Chartered Financial Analyst Level 2

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Explanation:

Arbitrage Pricing Theory (APT) has several key characteristics:

Option A is incorrect: APT does not assume a single-factor model. It can accommodate multiple factors that affect asset returns
Option B is incorrect: APT assumes that well-diversified portfolios should NOT provide arbitrage opportunities in efficient markets
Option C is correct: APT does not specify which particular risk factors drive returns. It only states that asset returns are linearly related to multiple systematic risk factors, but the specific identity of these factors is not prescribed by the theory itself

APT is more flexible than CAPM in that it allows for multiple risk factors without specifying what they are, leaving that determination to empirical testing.

Explanation:

Arbitrage Pricing Theory (APT) has several key characteristics:

Option A is incorrect: APT does not assume a single-factor model. It can accommodate multiple factors that affect asset returns
Option B is incorrect: APT assumes that well-diversified portfolios should NOT provide arbitrage opportunities in efficient markets
Option C is correct: APT does not specify which particular risk factors drive returns. It only states that asset returns are linearly related to multiple systematic risk factors, but the specific identity of these factors is not prescribed by the theory itself

APT is more flexible than CAPM in that it allows for multiple risk factors without specifying what they are, leaving that determination to empirical testing.

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14 The arbitrage pricing theory:

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assumes that a single-factor model describes asset returns.

assumes that well-diversified portfolios provide arbitrage opportunities.

does not prescribe the identity of risk factors related to generating returns.