Financial Risk Manager Part 1
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Sally Smith, FRM, is considering a switch in the theoretical basis of her risk model from a simple single-factor capital asset pricing model (CAPM) to a multi-factor arbitrage pricing theory (APT) model. To her manager, she claims the following differences between the two models. Each of her statements below is correct EXCEPT which is not?
A
Compared to only one specific factor (i.e., market index) in the simple CAPM, the APT model will be able to recognize multiple systematic risk factors.
B
While the CAPM requires a mean-variance efficient market portfolio and assumes normally distributed returns, APT requires neither of these assumptions.
C
Although APT does not require several of the restrictive assumptions of the CAPM, it is largely silent on where to look for priced sources of risk.
D
In contrast to the simple CAPM, the APT cannot include the market index as a common factor, nor can it be extended over multiple periods.