S.J. CHANG* INTRODUCTION Ever since the Arbitrage Pricing Theory (APT) was introduced, there have been extensive research efforts to relate it to the more familiar, long reigning Capital Asset Pricing Model (CAPM). First of all, in an effort to link the two models, some researchers refute the earlier-day common wisdom which considers the CAPM as a single-factor model and the APT as a multifactor model. Ross (1976), Rosenberg and Guy (1976), and Sharpe (1977) were among the first to develop multi-beta interpretations of the CAPM by noting that the market return can be decomposed into a linear combination of several fundamental economic factors. Shanken (1982 and 1985) points out that it is misleading to say that the CAPM involves only one source of risk and the APT allows for multiple risk measures. He also notes that the linearity of the market return in the systematic factors follows immediately from the CAPM, While Chen (1983) notes that a multi-beta pricing relation can always be reduced to a single-beta relation, Dybvig and Ross (1985) show that if asset returns follow a linear factor model, the CAPM implies the APT. McElroy and Burmeister (1988) and Burmeister and McElroy (1988) also state
Journal of Business Finance & Accounting – Wiley
Published: Apr 1, 1991
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