Question: a) Carefully explain the three main approaches for selecting the factors in factor models and the advantages and disadvantages of each approach. (40%) b) The

a) Carefully explain the three main approaches for selecting the factors in factor models and the advantages and disadvantages of each approach. (40%) b) The Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) have different theoretical foundations. Describe the relative strengths and weaknesses of each theoretical structure. (45%) c) Explain how arbitrage ensures that any relative asset mispricings are quickly removed. (15%) a) Carefully explain the three main approaches for selecting the factors in factor models and the advantages and disadvantages of each approach. (40%) b) The Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) have different theoretical foundations. Describe the relative strengths and weaknesses of each theoretical structure. (45%) c) Explain how arbitrage ensures that any relative asset mispricings are quickly removed. (15%)

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