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APT (Chen et al. (1986) (Level of industry activity, the rate of inflation…
APT
Chen et al. (1986)
Level of industry activity
the rate of inflation
the spread between short and long-term US Gov. yield
the spread between the yields of low risk and high risk corporate bonds
Fama and French (1996) Three Factor Models
Market Factor
Size Factor
Book-to-Market Factor
Similar to CAPM - starts with CAPM but adds 2 more factors, SMB and HML
CAPM vs APT
Similarities
expected return depends of systematic risk
CAPM - special form of APT
linear return generating process
Unsystematic risk - diversified
explain risk/return
Differences
APT - larger computational burden
Assumptions - CAPM 12, APT 6.
APT - Fit the facts but less stable
CAPM - not testable
APT - multifactor CAPM - single factor
Problems with APT
Identifying APT factors