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Arbitrage Pricing Model

The arbitrage pricing model (based on the arbitrage pricing theory) was first introduced academically in 1976- In 1988 it first became available in a commercially usable form, ft relies on risk factors of a pervasive economic nature.

1. All of the following are risk factors commonly considered by the arbitrage pricing model

a. Company-specific risk.

b. Confidence risk, measured as the di fference between long-term corporate bond expected returns and long-term government bond expected returns.

c. Interest rate (time horizon) risk.

d. Inflation risk.

2. Which of the following best describes (he arbi trage pricing model?

a. A linear model.

b. A muitivariabie model.

c. A discounted cash flow (DCF) model.

d. A build-up model.

3. The arbitrage pricing model does not specify its risk factors.

4.The arbitrage pricing model works better for individual stocks than for groups of stocks.

5.The arbitrage pricing model is used less than the build-up model, the Capital Asset Pricing Model, or the DCF model (see also about asset management).

6. The arbitrage pricing model would work well for estimating the cost of equity capital for a regional chain of doughnut shops.

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