KIC000029 - ,. I The CAPM and the APT CAPM Refinements...

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,. I The CAPM and the APT CAPM Refinements While the APT is more general than the CAPM, it does not Over the years, it has become apparent that the CAPM fails specify the number or identity of the risk factors. The to correctly price all stocks. Certain characteristics, in CAPM specifies a single market factor. addition to overall market exposure, have been found to matter. In particular, However, both the CAP~ and the APT agree on the • Firm market capitalization ("Size") - Fama French, 1993 fundamental expected return-beta relationship. • Firm book-to-market ("Value") - Fama French, 1993 Specifically, • Prior l-year stock return ("Momentum") - Carhart, 1997 Themarketonlycompensatesinvestorsforbearingsystematicrisk Stock tradability ("Liquidity") - Pastor Stambaugh, 2003 The risk-returntradeoffappearsto be linearin nature Each of these characteristics produces abnormal returns that are too large to explain by chance alone. CAPM Refinements A Popular Multifactor Pricing Model Suppose we sort all stocks according to one of these Fama and French (1993) proposed a three-factor
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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KIC000029 - ,. I The CAPM and the APT CAPM Refinements...

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