According to Mock 2 Apt does not specify: 1. Identity of the risk factors 2. Number of risk factors that exist Doesn’t it indentify the identity of the risk factors.? Say exposure to S&P 500 or increase in inflation. Aren’t these risk factors?

it identifies but doesn’t number

APT is arbitrary. While Fama/French did develop a 3 factor model, one could use any factors they see fit.

According to the answer, “The APT Model does not specify the identity of the factors nor the number of factors.”

Yeah but generic APT just says its the R(f) + exposure to some number of factors at some level of exposure.

Basically pick whatever you want.

Niblita75 Wrote: ------------------------------------------------------- > Basically pick whatever you want. What do you mean?

i dont’ get it APT doesn’t specify but it can if you pick the right factors?

The way to think is APT is used to arbitrage. As long as you come up with a model (doesn’t matter the number of risk factors, or what factors they are) which can generate risk free profit, it is an APT model.

But, and here is the contradictory part. APT assums arbitrage opportunities dont exist because they will be immediatly exploited. APT = Rf + b1(X) + b2(Y) + b3(Z) …bn(N) the thing could virtually go on and on with anything you want to regress. I think of it as a blank canvas, you can paint anything you want on it…

This question totally confused me. To me, when you see the formula, you see the identity of risk factors and you know the number…I just don’t get it.

stop studying.

mark@dirtbags Wrote: ------------------------------------------------------- > This question totally confused me. > > To me, when you see the formula, you see the > identity of risk factors and you know the > number…I just don’t get it. But the person putting together the model is the one who identified the risk factors and the amount of risk factors. APT doesn’t identify any pieces. It’s up to you to choose which to include, and how many.