Chapter 7, Problem 30PS

Summary Introduction

To determine:

Whether the number of explanatory variable is required to small to make APT a useful theory

Introduction:

APT stands for arbitrage pricing theory which refers to the asset pricing model (multi factor) that is based on the notion that the return of the asset can be forecasted by taking into consideration linear relationship underlying the number of macroeconomic variables and expected return of the asset that capture the systematic risk.