1 / 14

# The Arbitrage Pricing Model - PowerPoint PPT Presentation

The Arbitrage Pricing Model. Lecture XXVI. A Single Factor Model. Abstracting away from the specific form of the CAPM model, we posit a single factor model written as

Related searches for The Arbitrage Pricing Model

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

## PowerPoint Slideshow about 'The Arbitrage Pricing Model' - fauve

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

### The Arbitrage Pricing Model

Lecture XXVI

• Abstracting away from the specific form of the CAPM model, we posit a single factor model written as

• In this model, the random return on an investment zi is a linear function of some random factor fi and an idiosyncratic term i.

• Abstracting away from the idiosyncratic risk

• If the bis of two assets are the same, then the ais must be the same for an arbitrage free model.

• Suppose we are interested in forming a portfolio of two assets with different bis, bi  bj , bi  0, bj  0

• Suppose that asset returns are generated by a two factor linear model:

• A portfolio of these assets then yields

• The matrix

must be singular, or the first row must be a linear combination of the last two rows