Which statement(s) below about CAPM versus multiple-factor APT is/are correct? I. CAPM could be viewed as a special one-factor APT II. APT does not specify the sources of risks III. APT provides guidance about the number of factors IV. APT provides guidance about the magnitude of factor risk premium in equilibrium

Question

BlackTom AI · Accepted Answer

Here’s a structured walk-through of each option related to CAPM versus multiple-factor APT.

Option a: 'I, II, and III only' This would claim that CAPM is a special one-factor APT (I) and that APT does not specify the sources of risks (II), and that APT provides guidance about the number of factors (III). While I and II are true, III is not correct because APT does not prescribe a specific number of factors in general; the model allows for an arbitrary set of factors and the exact count is not fixed by APT theory itself. Therefore, this option is not fully accurate.

Option b: 'I and II only' This option asserts that CAPM can be viewed as a special case of a one-factor APT (I) and that APT does not specify the sources of risks (II). Both statements align with standard interpretations: CAPM behaves as a one-factor model within the broader APT framework, and APT does not mandate which systematic risk factors must be included. This option captures the correct pair of ideas, while excluding III and IV which are not correct for the reasons just noted.

Option c: 'I and III only' This would imply that CAPM is a special one-factor APT (I) and that APT provides guidance about the number of factors (III). As discussed under option a, APT does not prescribe a specific number of factors; thus III is incorrect, making this option inaccurate overall.

Option d: 'II and III only' This would claim that APT does not specify sources of risks (II) and that APT provides guidance about the number of factors (III). While II is true, III is not, so this combination is incorrect.

Option e: 'All of I, II, III and IV' This would assert that all four statements are true. Since III is incorrect (APT does not provide a fixed guide on the number of factors) and IV is also incorrect (APT does not specify the magnitude of factor risk premia in equilibrium), this option cannot be correct.

In summary, the only statements that coherently align with established understanding are I and II, while III and IV misstate aspects of APT’s guidance on factor count and factor premia. The combination that reflects that pair of truths is option b, I and II only.

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