Financial Risk Manager Part 1

Explanation

The correct answer is A - APT places more emphasis on systematic risks.

Key Differences Between CAPM and APT:

CAPM (Capital Asset Pricing Model):

• Based on a single systematic risk factor (market risk)
• Uses beta (β) as the sole measure of systematic risk
• Assumes all investors hold the market portfolio
• Derived from equilibrium conditions in capital markets

APT (Arbitrage Pricing Theory):

• Allows for multiple systematic risk factors
• Can include macroeconomic factors like inflation, interest rates, GDP growth, etc.
• Based on the no-arbitrage principle rather than equilibrium
• More flexible in identifying relevant risk factors

Why Option A is Correct:

APT actually places more emphasis on systematic risks because it recognizes that multiple systematic factors (not just market risk) can affect asset returns. While CAPM focuses on a single systematic factor (market risk), APT acknowledges that various macroeconomic and systematic factors can influence returns.

Why Option B is Incorrect:

APT does not downplay the importance of diversification. Both models recognize the importance of diversification, but APT provides a more nuanced approach by considering multiple risk factors that can be diversified away through appropriate portfolio construction.