Can someone hit the highlights on each one of these models? Compare and contrast would also be appreciated. To begin with, can someone confirm that the APT uses the risk free rate as the intercept while the Market model uses the stock return when market return = 0 as the intercept.

phBOOM Wrote: ------------------------------------------------------- > Can someone hit the highlights on each one of > these models? Compare and contrast would also be > appreciated. > > To begin with, can someone confirm that the APT > uses the risk free rate as the intercept while the > Market model uses the stock return when market > return = 0 as the intercept. This is right. Remember that the market model is a historical regression used to get betas for input use in mean variance analysis.

market model return on investment = stock’s average return unrelated to market return + the stock’s beta x return on the market

CAPM is a special case of APT where there is only one risk premium, E(Rm) over Rf

what are the less restrictive set of assumptions with APT again? There is only systematic risk captured in APT and it’s an equillibrium model if memory serves.

less restrictive because you can have as many factors as you want to explain the return.

It’s more involved than that though deep. I think there are less restrictive assumptions that are inherent in the capital market line?

I thought the advantage of the APT would be that you could model all kinds of risk with it. CAPM on the other hand, only systematic (Beta)

APT should be for well-diversifited port, so no specific risks…