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CAPM theory predicts that all assets should be priced such that they fit along the security market line one
way or the other. If a stock is priced such that it offers a higher return than what is predicted by CAPM,
investors will rush to buy the stock. The increased demand will be reflected in a higher stock price and
subsequently in lower return. This will occur until the stock fits on the security market line. Similarly, if a
stock is priced such that it offers a lower return than the return implied by CAPM, investor would hesitate
to buy the stock. This will provide a negative impact on the stock price and increase the return until it
equals the expected value from CAPM. 5.7 Alternative asset pricing models
5.7.1 Arbitrage pricing theory Arbitrage pricing theory (APT) assumes that the return on a stock depends partly on macroeconomic
factors and partly on noise, which are company specific events. Thus, under APT the expected stock
return depends on an unspecified number of macroeconomic factors plus noise:
(33) Expected r...
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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.
- Spring '12