Reference no: EM131179244

It is necessary to understand the equilibrium models of the Capital Asset Pricing Model and the Arbitrage Pricing Theory. Each model attempts to explain returns as a function of a risk measure(s). The CAPM extends the diversification discussion by modeling the element of risk that all investors cannot remove through diversification, i.e. the systematic risk. This risk is measured as beta, which is one of the more famous measures within the area of investments. The APT makes use of arbitrage arguments to form a model of return as a function of many possible risk factors. Upon successful completion of this assignment, you will have shown your ability to evaluate the Capital Asset Pricing Model and the Arbitrage Pricing Theory as it relates to risk and returns.

Write a paper in which you include the following:

• Describe and illustrate the CAPM
• Describe and illustrate the APT
• Compare and contrast the effects of CAPM and the APT

Support your paper with at least three (3) resources. In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included. Your paper should demonstrate thoughtful consideration of the ideas and concepts that are presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to Northcentral University's Academic Integrity Policy.

Length: 5-7 pages (not including title and reference pages)