The APT Model in Investment Management Essay

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Executive summaryThe Capital Asset Pricing Model (CAPM) is considered a pivotal model in the computation of investment risk and the expected return on the investment. CAPM provides a way of ascertaining the expected return for stocks and estimating the required return. The single-index model (SIM) also aids in measuring the return and risk of a stock. It assumes that there is only one macroeconomic factor that brings about systematic risk influencing all stock returns. The APT model proposes that the return on financial security has a linear relationship with H systematic risk factors. The assertion made is that investors want to be given compensation for all of the risk factors that have a systematic impact on a security return. The Fama-French (FF) three-factor model divides the fundamental factors into three factors comprising the value factor, market factor, and scale factor for a more improved expounding influence of excess return.

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The model’s rationale is that firms with high value and small-capitalization repeatedly outperform the overall market. The Black-Scholes formula expresses the current value of a European call option on a stock that does not pay any dividends before the option\'s expiration. As computed, the call option is 11.06, whereas the put option is 3.93. As computed, the Sharpe ratio is 0.68, the Treynor Measure is 11.97, Jensen\'s Alpha is 2.05, and the information ratio is 0.098.Table of contentsIntroduction 4CAPM and extensions 4APT and extensions 6Economic indicators and the business cycle 8Option pricing 8Forward and Futures pricing 10Performance evaluation models 11Recommendations 14Conclusions 14.....

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