answer:
| CAPM | APT | |
| Formulla | ra = rrf + Ba (rm – rrt) | E(rj) = rf + bj1RP1 +bj2 RP2 +……bjnRPn |
| assumptions | Assets are dividable | Investors tend towards risk aversion |
| no transaction costs (e.g. taxes) | returns will follow the above equation | |
| Investors will maximise their expected utility | Short sales are not restricted | |
| There is a homogeneity of beliefs | All investors think alike. | |
| The calculations are on a single time period | There are no transaction costs | |
| All assets are marketable | ||
| There are no restrictions to investment in assets | ||
| Issue behinf theory | linearity of the equation used to calculate the CAPM but CAPM calculations do not match empirical results | the macroeconomic environment in general, and how likely it is that the environment might influence the movement of the asset ( |
| CAPM assumes that there is a linear relationship between the assets | there is a linear relationship between risk factors |
