Question: Question 2 The Multifactor CAPM and Arbitrage Pricing Theory (APT) are elegant theories of how exposure to systematic risk factors should affect expected returns. However,

Question 2 The Multifactor CAPM and Arbitrage Pricing Theory (APT) are

Question 2 The Multifactor CAPM and Arbitrage Pricing Theory (APT) are elegant theories of how exposure to systematic risk factors should affect expected returns. However, they fail in identifying what these systematic risk factors must be. Chen, Roll and Ross (1986) have specified factors as candidates for sources of systematic risk: a. Define and explain the Chen, Roll and Ross (1986) Security Characteristic Line. [10 marks] b. How has the Chen, Roll and Ross (1986) model been tested? What are the results of this test? Discuss. [10 marks] C. Do you know any alternative model that has specified other potential sources of systematic risk? If so, explain this model and the results of its test. [5 marks]

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