A Simple Exposition of The Arbitrage Pricing Theory Approximation

John J. Beggs
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John J. Beggs: Australian National University.

Australian Journal of Management, 1986, vol. 11, issue 1, 13-22

Abstract: This paper presents the Arbitrage Pricing Theory (APT) in a finite economy for the familiar case of quadratic utility functions. The standard APT result of a linear relationship between expected returns and the covariances of returns is shown to be approximately true, and an expression for the error of the approximation is given. Some suggestive calculations indicate that the error in the approximation is likely to be small.

Keywords: PORTFOLIO ANALYSIS; CAPM; QUADRATIC PREFERENCES (search for similar items in EconPapers)
Date: 1986
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:11:y:1986:i:1:p:13-22

DOI: 10.1177/031289628601100102

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