Financial Risk Manager Part 1

The Arbitrage Pricing Theory (APT) is indeed more flexible than the Capital Asset Pricing Model (CAPM) because the benchmark portfolio used in the security market line does not have to be the true market portfolio. This is a significant advantage of the APT over the CAPM. In the CAPM, the benchmark return used to establish the security market line is typically the market portfolio, which is often unobservable and therefore a source of potential error. However, the APT allows for more flexibility in choosing the benchmark portfolio, making it more practical and adaptable to different market conditions.