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Compare and contrast the Capital Asset Pricing Model and the Arbitrage Pricing Model.
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Compare and contrast the Capital Asset Pricing Model and the Arbitrage Pricing Model. Introduction This essay is aim to compare and contrast the CAPM and APM . Both of these two model are equilibrium asset pricing model .To understand the similarities and differences between them , Firstly, we will derive and interpret CAPM and APM . Then compare them in different sides and rise the limitation of the CAPM . Finally , we will analysis whether and how the APM can avoid these problem . Derive CAPM and APM CAPM: "The Capital Asset Pricing Model is an equilibrium model of asset pricing, it states that the expected return on a security is a positive linear function of the security's sensitivity to changes in the market portfolio's return." To derive the CAPM, first we must assume away the complexities since the real world is sufficiently complex, and focus on the most important element . These assumption are...
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