As such the theory does not specify what the factors

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Unformatted text preview: eturn a  b1 ˜ r factor 1  b2 ˜ r factor 2  !  bn ˜ r factor n  noise Where b1, b2,…,bn is the sensitivity to each of the factors. As such the theory does not specify what the factors are except for the notion of pervasive macroeconomic conditions. Examples of factors that might be included are return on the market portfolio, an interest rate factor, GDP, exchange rates, oil prices, etc. Similarly, the expected risk premium on each stock depends on the sensitivity to each factor (b1, b2,…,bn) and the expected risk premium associated with the factors: (34) Expected risk premium b1 ˜ (r factor 1  r f )  b2 ˜ (r factor 2  r f )  !  bn ˜ (r factor n  r f ) In the special case where the expected risk premium is proportional only to the portfolio's market beta, APT and CAPM are essentially identical. Download free ebooks at 40 Corporate Finance Risk, return and opportunity cost of capital APT theory has two central statements: 1. A diversified portfolio designed to eliminate the macroeconomic risk (i...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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