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CHAPTER 11 POWERPOINT PRESENTATION

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(1)

CHAPTER ELEVEN ARBITRAGE

PRICING THEORY

(2)

FACTOR MODELS

ARBITRAGE PRICING THEORY (APT)

• is an equilibrium factor mode of security returns

• Principle of Arbitrage

the earning of riskless profit by taking advantage of differentiated pricing for the smae physical asset or security

• Arbitrage Portfolio

requires no additinal investor funds

no factor sensitivity

has positive expected returns

(3)

FACTOR MODELS

 ARBITRAGE PRICING THEORY (APT)

• Three Major Assumptions:

 capital markets are perfectly competitive

 investors always prefer more to less wealth

 price-generating process is a K factor model

(4)

FACTOR MODELS

MUTIPLE-FACTOR MODELS

• FORMULA

r i = a i + b i1 F 1 + b i2 F 2 +. . . + b iK F K +e i

where r is the return on security i b is the coefficient of the factor

F is the factor

(5)

FACTOR MODELS

 SECURITY PRICING

• FORMULA:

r

i

= 

0

+ 

1

b

1

+ 

2

b

2

+. . .+ 

K

b

K

where

r

i

= r

RF

+(

1

r

RF

b

i1



2

r

RF

)b

i2

+

r

RF

b

iK

(6)

FACTOR MODELS

where r is the return on security i



is the risk free rate b is the factor

e is the error term

(7)

FACTOR MODELS

 hence

• a stock’s expected return is equal to the

risk free rate plus k risk premiums based

on the stock’s sensitivities to the k factors

(8)

END OF CHAPTER 11

Referanslar

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