(a) Three models namely Mean Variance Optimization, Capital Asset Pricing Model and the Arbitrage Pricing Model have underpinned asset pricing models and the theory of finance. Briefly discuss why if any of the three models works, then it implies the applicability or otherwise of the other two in an economy.

(b) John and Mary are two investors with the same utility function i.e U(·) ® U_John(·) = U_mary(·) but different levels of initial wealth. Will John and Mary be characterized by identical risk aversion? Justify using suitable workings.

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Arbitrage pricing theory APT is another to the capital asset pricing model CAPM for explaining returns of assets or portfolios it had been developed by economist Stephen Ross within the 1970s Over the ... View the full answer