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The Arbitrage Pricing Theory as an Approach to Capital Asset Valuation (Paperback)
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The Arbitrage Pricing Theory as an Approach to Capital Asset Valuation (Paperback)
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Diploma Thesis from the year 1996 in the subject Business economics
- Banking, Stock Exchanges, Insurance, Accounting, grade: 1,3,
European Business School - International University Schloss
Reichartshausen Oestrich-Winkel, 160 entries in the bibliography,
language: English, abstract: A "few surprises" could be the trivial
answer of the Arbitrage Pricing Theory if asked for the major
determinants of stock returns. The APT was developed as a traceable
framework of the main principles of capital asset pricing in
financial markets. It investigates the causes underlying one of the
most important fields in financial economics, namely the
relationship between risk and return. The APT provides a thorough
understanding of the nature and origins of risk inherent in
financial assets and how capital markets reward an investor for
bearing risk. Its fundamental intuition is the absence of arbitrage
which is, indeed, central to finance and which has been used in
virtually all areas of financial study. Since its introduction two
decades ago, the APT has been subject to extensive theoretical as
well as empirical research. By now, the arbitrage theory is well
established in both respects and has enlightened our perception of
capital markets. This paper aims to present the APT as an
appropriate instrument of capital asset pricing and to link its
principles to the valuation of risky income streams. The objective
is also to provide an overview of the state of art of APT in the
context of alternative capital market theories. For this purpose,
Section 2 describes the basic concepts of the traditional asset
pricing model, the CAPM, and indicates differences to arbitrage
theory. Section 3 constitutes the main part of this paper
introducing a derivation of the APT. Emphasis is laid on principles
rather than on rigorous proof. The intuition of the pricing formula
and its consistency with the state space preference theory are
discussed. Important contributions to the APT are classified and b
General
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