Reconciling the Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM) Institutional and Theoretical Framework

Abstract

This paper examines the development of the capital assets pricing model (CAPM), which was developed by William Sharpe and John Lintner. It also looked at the various assumptions of CAPM and APT, and the contribution of Ross to the Arbitrage Pricing Theory (APT) in explaining the relationship between risk and return. The CAPM indicates that a linear relationship exists between a security required rate of return and its beta. The empirical verification of risk-return relationship indicates the mean-variance efficiency of the market proxy.

Keywords: Arbitrage Pricing Theory, Capital Asset Pricing Model, Reconciliation.


Article Review Status: Published

Pages: 17-23 (Download PDF)

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