Term
| (3) types of Arbitrage Opportunities |
|
Definition
1)Law of one price - asset can be bought and sold simultaneously in two different places
2)two assets with identical risks and different prices
3)Non-Negative Profits in All Scenarios - two assets which cost the same, but one has higher profits in all scenarios |
|
|
Term
|
Definition
| APT is based on the concept that arbitage opportunities cannot exist. No market portfolio required. CAPM requires market portfolio but does apply to all securities. |
|
|
Term
| Single Factor model equation |
|
Definition
|
|
Term
|
Definition
| use multiple factor betas/factor sensativities/factor loading to reflect multiple economic factors |
|
|
Term
| Multifactor Security Market Line (SML) |
|
Definition
E(r) = rf +ß[E(rm) - rf]
[E(rm) - rf] = Expected Risk Premium |
|
|
Term
| (3) key propositions of arbitrage pricing theory |
|
Definition
- security returns can be described by factor model
- there are sufficent securities to diversify away idiosyncratic risk
- well-functioning markets do not allow for the persistence of arbitrage opportunities
|
|
|
Term
| Difference between Arbitrage and Dominance argument |
|
Definition
dominance = requires many investors to make small changes
arbitrage = few investors take large positions
arbitrage is stronger, only need few investors to act |
|
|
Term
| definition of well-diversified portfolio |
|
Definition
| portfolio diversified over large enough number of securities s.t. each weight is small enough that σ2(ep) is negligible |
|
|
Term
| Chen, Roll and Ross equation |
|
Definition
| rit = αi + ßiIP + ßiEI +ßiUI + ßiCG + ßiGB + eit |
|
|
Term
| Chen, Roll and Ross factors (5) |
|
Definition
IP = %change in industrial production EI = %change in expected inflation
UI = %change in unanticipated inflation
CG = excess return long-term corp bonds over long-term gov bonds
GB = excess return of long term gov bonds over T-Bills |
|
|
Term
| Fama-French(FF) three factor model |
|
Definition
rit = αi + βiMRMt+βiSMBSMBt+βiHMLHMLt +eit
- RMt =Market risk
- SMB=Small - Big, excess return of small stocks over large
- HML= High minus Low, excess return of high book to market ratio firms over low ratio firms
|
|
|
Term
Difference between risk sources of Multifactor CAPM vs
Multifactor APM |
|
Definition
CAPM risk sources will be broad market sources that investors seek to hedge. Such as consumption, nontraded assets and chgs in opportunities
APT is silent on priced sources of risk. Leads to less structured search for causes of risk. |
|
|
Term
| E(Ri) Adjust CAPM for labor |
|
Definition
E(Ri) = E(Rm) *
Cov (Ri,Rm) + (PH/PM)Cov(Ri,Rh) /
σm2 +(PH/PM)Cov(Rm,Rh) |
|
|
Term
|
Definition
Trin = (volume declining/number of declines) /
(volume advancing/number advancing) |
|
|
Term
|
Definition
confidence index =
avg yield on top 10 corporate bonds/
avg yield on intermediate 10 rated corp bonds |
|
|
