Answer: APT places more emphasis on systematic risks.

## 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.

Author: Tanishq Prabhu