A Comparison of CAPM & Arbitrage Pricing Theory
A Comparison of CAPM & Arbitrage Pricing Theory
Submitted in partial fulfillment of the requirements of The M.B.A Degree Course of Bangalore University
By
RAKESH KUMAR
(REGD.NO: 05XQCM6071)
Under the Guidance
Of
Dr. T. V. Narasimha Rao
M.P.BIRLA INSTITUTE OF MANAGEMENT Associate Bharatiya Vidya Bhavan 43, Race Course Road, Bangalore560001
20052007
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A Comparison of CAPM & Arbitrage Pricing Theory
DECLARATION
I hereby declare that this dissertation work entitled “A Comparison
of CAPM & Arbitrage Pricing Theory” is a bonafide study,
completed under the guidance and supervision of Dr. T.V.N.Rao
and submitted in partial fulfillment for the award of MASTERS
OF BUSINESS ADMINISTRATION degree at Bangalore
University.
I further declare that this project is the result of my own effort and
that it has not been submitted to any other university/institution for
the award of any degree or diploma or any other similar title of
recognition.
BANGALORE
DATE:
M.P.BIRLA INSTITUTE OF MANAGEMENT
RAKESH KUMAR Reg No: 05XQCM6071
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A Comparison of CAPM & Arbitrage Pricing Theory
PRINCIPAL’S CERTIFICATE
I here by certify that this project dissertation report is undertaken and completed by Mr. Rakesh Kumar bearing Reg. No. 05XQCM6071 on “Comparison of CAPM & Arbitrage Pricing Theory” under the guidance of Dr: T. V. N RAO Adjunct Professor, M P Birla Institute of Management, Bangalore.
Place: Bangalore Date:
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Dr Nagesh S Malavalli (Principal, MPBIM)
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A Comparison of CAPM & Arbitrage Pricing Theory
GUIDE CERTIFICATE
I here by certify that project work embodied in the dissertation entitled is the result of an study undertaken and completed by Mr. Rakesh Kumar bearing Reg No: 05XQCM6071 on “A Comparison of CAPM & Arbitrage Pricing Theory” under my guidance and supervision.
Place: Bangalore DATE:
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Dr: T. V. N RAO
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A Comparison of CAPM & Arbitrage Pricing Theory
ACKNOWLEDGEMENT
As students collect accolades in the form of grades for the success in his endeavors and his success depends on adequate preparation and in domination and most important of all the support received from his guide. So the accolades I earn of this project, I would like to share with all those who have played a notable part in its making In these two months I have worked on it, I feel indebted to many and extend my heart full gratitude and profusely thank those people who not only gave assistance to me but also participated in the making of this project.
I sincerely thank to Dr .T.V.N Rao my esteemed project guide for his valuable advice, assistance and guidance provided. I also remain grateful to all my friends for their assistance to prepare this project successfully.
My gratitude will not be complete without thanking the almighty god and my loving parents who have been supportive through out the project.
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Rakesh Kumar
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A Comparison of CAPM & Arbitrage Pricing Theory
TABLE OF CONTENTS
CHAPTERS 
PARTICULARS 
PAGE 
NO. 

ABSTRACT 
01 

1 
INTRODUCTION AND THEORETICAL BACKGROUND 
02 
2 
REVIEW OF LITERATURE 
10 
3 
RESEARCH METHODOLOGY 
14 
3.1 
PROBLEM STATEMENT 
15 
3.2 
OBJECTIVE OF THE STUDY 
15 
3.3 
SAMPLE SIZE AND DATA SOURCES 
16 
4 
CONCLUSION 
17 
5 
BIBLIOGRAPHY 
19 
6 
ANNEXURE 
24 
7 
REFERENCES 
26 
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ABSTRACT
This research presents some new evidence that Arbitrage Pricing Theory may lead to different and better estimates of expected return than the Capital Asset Pricing Model, particularly in the case of cost of capital. Results for monthly portfolio returns for 2001 2006 lead to the conclusion that regulators should not adopt the singlefactor risk approach of the CAPM as the principal measure of risk, but give greater weight to APT, whose multiple factors provide a better indication of asset risk and a better estimate of expected return.
Not withstanding initial skepticism and recent challenges, the Capital Asset Pricing Model (CAPM) has been used to develop project screening rates, value companies, measure the impact of policy change on risk, and construct portfolios. Recently, the Federal Energy Regulatory Commission (FERC) proposed it as the principal measure of risk for the electric utilities it regulates. It would be ironic for acceptance of CAPM by policymakers to occur just as Arbitrage Pricing Theory (APT) threatens to replace it as an explanation of the relationship between return and risk. And it would be a pity if FERC were to adopt the single risk factor approach of CAPM when it could be demonstrated that the multiple factors of APT provide a better indication of asset risk and a better estimate of expected return. This paper presents some new evidence that APT may lead to different and better estimates of expected return than CAPM and that it may be more helpful to policymakers as a result. We describe CAPM and APT, note work done by others, show how estimates of required returns for utilities developed by applying each model may differ, and finally report the evidence that convinces us that if one model is to be relied upon for policy purposes, APT would be the better choice.
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CHAPTER 1 INTRODUCTION AND THEORETICAL BACKGROUND
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INTRODUCTION AND THEORETICAL BACKGROUND
The estimation of firm’s cost of capital remains one of the most critical and challenging issues faced by financial managers, analysts, and academicians. Although theory provides several broad approaches, recent survey evidence reports that among large firms and investors, the Capital asset pricing model (CAPM) is by far the most widely used model.
The Arbitrage Pricing Theory (APT),originally formulated by Ross, and extended by Huberman and Connor, is an asset pricing model that explains the crosssectional variation in asset returns. Like the Capital Asset Pricing Model (CAPM) of Sharpe, Lintner, and Black, the APT begins with an assumption on the return generating process:
each asset return is linearly related to several, say k, common "global" factors plus its own idiosyncratic disturbance.
Capital Asset Pricing Model (CAPM): It is used in finance to determine a theoretically appropriate required rate of return (and thus the price if expected cash flows can be estimated) of an asset, if that asset is to be added to an already welldiversified portfolio, given that asset's nondiversifiable risk. The CAPM formula takes into account the asset's sensitivity to nondiversifiable risk (also known as systematic risk or market risk), in a number often referred to as beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical riskfree asset.
The model was introduced by Jack Treynor, William Sharpe, John Lintner and Jan Mossin independently, building on the earlier work of Harry Markowitz on
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A Comparison of CAPM & Arbitrage Pricing Theory
diversification and modern portfolio theory. Sharpe received the Nobel Memorial Prize in Economics (jointly with Harry Markowitz and Merton Miller) for this contribution to the field of financial economics.
The formula The CAPM is a model for pricing an individual security (asset) or a portfolio. For individual security perspective, we made use of the security market line (SML) and its relation to expected return and systematic risk (beta) to show how the market must price individual securities in relation to their security risk class. The SML enables us to calculate the rewardtorisk ratio for any security in relation to that of the overall market. Therefore, when the expected rate of return for any security is deflated by its beta coefficient, the rewardtorisk ratio for any individual security in the market is equal to the market rewardtorisk ratio, thus:
Individual security’s Rewardtorisk ratio
=
Market’s securities (portfolio) Rewardtorisk ratio
The market rewardtorisk ratio is effectively the market risk premium and by rearranging the above equation and solving for E (Ri), we obtain the Capital Asset Pricing Model
The APT model
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A Comparison of CAPM & Arbitrage Pricing Theory
Arbitrage pricing theory (APT), in Finance, is a general theory of asset pricing, that has become influential in the pricing of shares. The theory was initiated by the economist Stephen Ross in 1976.
APT holds that the expected return of a financial asset can be modeled as a linear function of various macroeconomic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor specific beta coefficient. The model derived rate of return will then be used to price the asset correctly  the asset price should equal the expected end of period price discounted at the rate implied by model. If the price diverges, arbitrage should bring it back into line.
If APT holds, then a risky asset can be described as satisfying the following relation:
where 

• 
E(rj) is the risky asset's expected return, 
• 
RPk is the risk premium of the factor, 
• 
rf is the riskfree rate, 
• 
Fk is the macroeconomic factor, 
• 
bjk is the sensitivity of the asset to factor k, also called factor loading, 
• 
and εj is the risky asset's idiosyncratic random shock with mean zero. 
That is, the uncertain return of an asset j is a linear relationship among n factors. Additionally, every factor is also considered to be a random variable with mean zero. Note that there are some assumptions and requirements that have to be fulfilled for the latter to be correct: There must be perfect competition in the market, and the total number of factors may never surpass the total number of assets (in order to avoid the problem of matrix singularity),
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A Comparison of CAPM & Arbitrage Pricing Theory
Arbitrage mechanics
In the APT context, arbitrage consists of trading in two assets – with at least one being
mispriced. The arbitrageur sells the asset which is relatively too expensive and uses the
proceeds to buy one which is relatively too cheap.
Under the APT, an asset is mispriced if its current price diverges from the price predicted by the model. The asset price today should equal the sum of all future cash flows discounted at the APT rate, where the expected return of the asset is a linear function of various factors, and sensitivity to changes in each factor is represented by a factor specific beta coefficient.
A correctly priced asset here may be in fact a synthetic asset  a portfolio consisting of
other correctly priced assets. This portfolio has the same exposure to each of the macroeconomic factors as the mispriced asset. The arbitrageur creates the portfolio by identifying x correctly priced assets (one per factor plus one) and then weighting the assets such that portfolio beta per factor is the same as for the mispriced asset. When the investor is long the asset and short the portfolio (or vice versa) he has created a position which has a positive expected return (the difference between asset return and portfolio return) and which has a netzero exposure to any macroeconomic factor and is
therefore risk free (other than for firm specific risk). The arbitrageur is thus in a position
to make a risk free profit:
Where today's price is too low:
The implication is that at the end of the period the portfolio would have appreciated at the rate implied by the APT, whereas the mispriced asset would have appreciated at more than this rate. The arbitrageur could therefore:
Today:
1 short sells the portfolio
2 buy the mispricedasset with the proceeds.
At the end of the period:
1 sells the mispriced asset
2 use the proceeds to buy back the portfolio
3 pocket the difference.
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A Comparison of CAPM & Arbitrage Pricing Theory
Where today's price is too high:
The implication is that at the end of the period the portfolio would have appreciated at the rate implied by the APT, whereas the mispriced asset would have appreciated at less than this rate. The arbitrageur could therefore:
Today:
1 short sells the mispricedasset
2 buy the portfolio with the proceeds.
At the end of the period:
1 sells the portfolio
2 use the proceeds to buy back the mispricedasset
3 pocket the difference.
Relationship with the capital asset pricing model The APT along with the capital asset pricing model (CAPM) is one of two influential theories on asset pricing. The APT differs from the CAPM in that it is less restrictive in its assumptions. It allows for an explanatory (as opposed to statistical) model of asset returns. It assumes that each investor will hold a unique portfolio with its own particular array of betas, as opposed to the identical "market portfolio". In some ways, the CAPM can be considered a "special case" of the APT in that the securities market line represents a singlefactor model of the asset price, where Beta is exposure to changes in value of the Market. Additionally, the APT can be seen as a "supply side" model, since its beta coefficients reflect the sensitivity of the underlying asset to economic factors. Thus, factor shocks would cause structural changes in the asset's expected return, or in the case of stocks, in the firm's profitability.
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A Comparison of CAPM & Arbitrage Pricing Theory
On the other side, the capital asset pricing model is considered a "demand side" model. Its results, although similar to those in the APT, arise from a maximization problem of each investor's utility function, and from the resulting market equilibrium (investors are considered to be the "consumers" of the assets).
Identifying the factors As with the CAPM, the factorspecific Betas are found via a linear regression of historical security returns on the factor in question. Unlike the CAPM, the APT, however, does not itself reveal the identity of its priced factors  the number and nature of these factors is likely to change over time and between economies. As a result, this issue is essentially empirical in nature. Several a priori guidelines as to the characteristics required of potential factors are, however, suggested:
1. Their impact on asset prices manifests in their unexpected movements
2. They should represent undiversifiable influences (these are, clearly, more likely to be macroeconomic rather than firmspecific in nature)
3. Timely and accurate information on these variables is required
4. The relationship should be theoretically justifiable on economic grounds Chen, Roll and Ross identified the following macroeconomic factors as significant in explaining security returns:
• Surprises in inflation;
• Surprises in GNP as indicted by an industrial production index;
• Surprises in investor confidence due to changes in default premium in corporate bonds;
• Surprise shifts in the yield curve.
As a practical matter, indices or spot or futures market prices may be used in place of macroeconomic factors, which are reported at low frequency (e.g. monthly) and often with significant estimation errors. Market indices are sometimes derived by means of factor analysis. More direct "indices" that might be used are:
• short term interest rates;
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A Comparison of CAPM & Arbitrage Pricing Theory
• The difference in longterm and short term interest rates;
• A diversified stock index such as the S&P 500 or NYSE Composite Index;
• oil prices
• gold or other precious metal prices
Currency exchange rates
Factor Analysis and the Estimation of the Factor Loadings:
The procedure to estimate factor loadings (i.e., the b,,'s) for all assets corresponding to the same set of common factors is quite involved and expensive. We first do a factor analysis on an initial subset of assets, and then we extend the factor structure of the subset to the entire sample. This is accomplished via a large scale mathematical programming exercise. Section I1 contains a brief outline.
It is clear that the development of the theory of arbitrage pricing is quite separate from the factor analysis. We use factor analysis here only as statistical tools to uncover the pervasive forces (factors) in the economy by examining how asset returns covary together. As with any statistical method, its result is meaningful only when the method is applied to a representative sample. In the present context, the initial subset to which the factor analysis is applied should consist of a large random sample of securities of net positive supply in the economy; thus the sample would be closely representative of the risks borne by investors. In a recent article, Shanken [37] points out some of the potential pitfalls of testing the APT, when the factored covariance matrix is unrepresentative of the co variation of assets in the economy.
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CHAPTER 2 REVIEW OF LITERATURE
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REVIEW OF LITERATURE
Review of literature .means examining and analyzing the various literatures available in any field either for references purposes or for further research.
Further research can be done by identifying the areas which have not been studied and in turn undertaking research to add value to the existing literature.
For the purpose of literature review various sources of information have been used. Sources include books, journals as well as some literature papers.
Nai fu chen :– Some Empirical Tests of the Theory of Arbitrage Pricing
In his project Nai fu Chen, had done some empirical tests of the theory of arbitrage, it estimate the parameters of APT. Using daily return data during the 196378 period, this project compare the evidence on the APT and the Capital Asset Pricing Model (CAPM) as implemented by market indices and find that the APT performs well. The theory is further supported in that estimated expected returns depend on estimated factor loadings, and variables such as own variance and firm size do not contribute additional explanatory power to that of the factor loadings.
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Empirical Result:
Based on the empirical evidence gathered so far, the APT cannot be rejected in favor of any alternative hypothesis, and the APT performs very well against the CAPM as implemented by the S&P 500, value weighted, and equally weighted indices. Therefore, the APT is a reasonable model for explaining crosssectional variation in asset returns.
K C John Wei:  An Asset Pricing Theory Unifying the CAPM and APT
This study shows that the competitiveequilibrium version of the APT may be extended to develop an exact model if idiosyncratic risks obey the Ross separating distribution. The results indicate that one only need add the market portfolio as an extra factor to the factor model in order to obtain an exact assetpricing relation. Thus, this study presents an extension and integration of the CAPM and APT. The "empirical" APT is also generalized to allow for some factors to be omitted from the econometric model employed to test the theory. The developed model is extremely robust and may be reduced to the CAPM or expanded to approximate Ross's APT depending upon the number of omitted factors. Further, the importance of the market portfolio is shown to be a monotonic increasing function of the number of omitted factors. Finally, the study demonstrates that, in a finite economy, the pricingerror bound of the Ross APT in a correlatedresiduals factor structure is an increasing function of the absolute value of marketresidual beta, rather than the weight of the asset in the market portfolio as is the case of uncorrelated factor residuals. However, under the normality assumption, the pricing error becomes an extra component related to the marketportfolio factor, and the exact assetpricing relation is once again obtained.
Conclusion:
The APT emphasizes the role of the covariance between asset returns and exogenous factors, while the CAPM stresses the covariance between asset returns and the
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endogenous market portfolio. In this study, the positive aspects of each model are combined to derive a theory unifying both models. The approach is based upon Connor's competitiveequilibrium version of the APT and Ross's separating distribution. The derived results demonstrate that one need only add the market portfolio as an extra factor to the factor model in order to obtain an exact assetpricing relation.
In addition to this derivation, they have also proved that the new approach may be applied to generalize the "empirical" APT with some factors omitted from the econometric model. This generalized theory is shown to be an integrated model of the CAPM and APT. If all factors are omitted, the new model reduces to the CAPM. When none of the factors is omitted, the new model becomes either the Ross APT in an infinite economy or the unified assetpricing theory in a finite economy.
Philip H Dybvig; Stephen A Ross :  Yes, The APT is Testable
The Arbitrage Pricing Theory (APT) has been proposed as an alternative to the meanvariance Capital Asset Pricing Model (CAPM). This paper considers the testability of the APT and points out the irrelevance for testing of the approximation error. We refute Shanken's objections, including his assertion that Roll's critique of the CAPM is applicable to the APT. We also explain the testability of the APT on subsets, and we explore the relationship between the APT and the CAPM.
The Arbitrage Pricing Theory uses a factor model for asset returns to capture the intuition that there are many close substitutes in asset markets. The word "arbitrage" in the name comes from the limiting case in which there is no idiosyncratic noise. In this case, the linearity of expected returns in factor loadings is a direct consequence of the absence of arbitrage, since in this case portfolios with identical factor loadings are perfect substitutes. More generally, the APT follows in theoretical models with assumptions ensuring that portfolios with identical factor loadings are close substitutes. Empirically,
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the APT should be tested as an equality. Understanding these definitions lies at the heart of the relationship between the theory and empirics of the APT.
CHAPTER 3 RESEARCH METHODOLOGY
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3.1 Statement of Problem
CAPM and APT have many uses in real life. They can be used for testing the efficiency of the market, to describe the return generating process and so on. Among the various uses, they are prominently employed for calculating the cost of capital. Hence, a study of their applicability will be usefull to the practitioners of Corporate Finance.
3.2 Objectives
To compare the applicability of Equilibrium Asset Pricing Models such as CAPM and APT.
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SAMPLE SIZE AND DATA SOURCES
In this study S&P CNX Nifty index has been considered as a proxy for the stock market and accordingly the closing index values were collected from Jan 1,2001 till December 31, 2006.
Out of the total observations the data pertaining to Jan 1, 2001 till December 2005 totaling 60 months observations of NIFTY were used for estimation of the model parameters and the remaining observations will be used for out of sample forecasting also known as hold out sample. Therefore the first month for which out of sample forecasts are obtained is January, 2006 and the out of sample forecasts were constructed for 12 months till December 2006. The monthly average prices were converted into continuous compounded returns in the standard method as the log differences:
R _{t} = ln (I _{t} / I _{t}_{}_{1} )
Where, I _{t} stands for the closing index value on day‘t’;
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CHAPTER
CONCLUSION
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Conclusion
The APT emphasizes the role of the covariance between asset returns and exogenous
factors, while the CAPM stresses the covariance between asset returns and the
endogenous market portfolio. The approach is based upon Connor's competitive
equilibrium version of the APT and Ross's separating distribution. The derived results
demonstrate that one need only add the market portfolio as an extra factor to the factor
model in order to obtain an exact assetpricing relation. If all factors are omitted, the new
model reduces to the CAPM. When none of the factors is omitted, the new model
becomes either the Ross APT in an infinite economy or the unified assetpricing theory in
a finite economy.
While calculating CAPM in this study,
• Value of R square is very low, so it does not have explanatory power
• Value of F test is less than its 5% significant level, so it is not significant
• Value of T test is less than 2 so it is not significant
• Calculated expected return is undervalued
CAPM is not valid.
In factor analysis we have taken 9 factors out of which only 2 factors are priced , but it is
not possible to recognize the factor. Factor 3 is showing negative t value and factor 7 is
showing positive t value.
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Annexure 

Table 1 

SUMMARY OUTPUT 

Regression Statistics 

Multiple R 
0.093422 

R 
Square 
0.008728 

Adjusted R 

Square 
0.00449 

Standard Error 
0.024928 

Observations 
77 

ANOVA 

Significance 

df 
SS 
MS 
F 
F 

Regression 
1 
0.00041 
0.00041 
0.660342 
0.419011285 

Residual 
75 
0.046606 
0.000621 

Total 
76 
0.047016 

Standard 
Upper 
Lower 
Upper 

Coefficients 
Error 
t Stat 
Pvalue 
Lower 95% 
95% 
95.0% 
95.0% 

 

Intercept 
0.004153 
0.007683 
0.540484 
0.590465 
0.011153056 
0.019458 
0.01115 
0.01945834 

 

X 
Variable 1 
0.006266 
0.007711 
0.812614 
0.419011 
0.009095149 
0.021627 
0.0091 
0.02162745 
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A Comparison of CAPM & Arbitrage Pricing Theory 

Table 2 

Rotated Component Matrix(a) 

1 
2 
3 
4 
5 
6 
7 
8 
9 

aurophar 
0.5109 
0.1203 
0.046 
0.3762 
0.0364 
0.1894 
0.204 
0.1807 
0.3552 
gail 
0.222 
0.3164 
0.5245 
0.1958 
0.2908 
0.3106 
0.1908 
0.1546 
0.126 
kotakmahin 
0.4871 
0.3458 
0.392 
0.0857 
0.0096 
0.044 
0.2063 
0.1703 
0.2545 
ttml 
0.1923 
0.2672 
0.021 
0.1126 
0.6198 
0.3564 
0.078 
0.1553 
0.0969 
cpcl 
0.1081 
0.3751 
0.4158 
0.4081 
0.1977 
0.2204 
0.019 
0.31 
0.1709 
ing 
0.1445 
0.6375 
0.2661 
0.0452 
0.3027 
0.0774 
0.0598 
0.2434 
0.118 
ingersol 
0.293 
0.4629 
0.2759 
0.3818 
0.0431 
0.0025 
0.146 
0.226 
0.191 
punjabtrac 
0.193 
0.1752 
0.1873 
0.3222 
0.0383 
0.4243 
0.3657 
0.3479 
0.0679 
hcl 
0.803 
0.0312 
0.0614 
0.2216 
0.2046 
0.0797 
0.1902 
0.0398 
0.007 
moserbaer 
0.0535 
0.3116 
0.1843 
0.0671 
0.005 
0.0681 
0.6254 
0.233 
0.027 
hdfcl 
0.2078 
0.335 
0.2124 
0.2603 
0.5473 
0.0085 
0.1673 
0.3601 
0.0189 
nicholus 
0.3475 
0.3343 
0.2169 
0.4588 
0.2781 
0.0699 
0.0919 
0.0338 
0.1895 
polaris 
0.6999 
0.2201 
0.1924 
0.1679 
0.0746 
0.1797 
0.1944 
0.129 
0.112 
siemens 
0.2733 
0.2714 
0.3148 
0.5175 
0.0643 
0.1048 
0.2713 
0.0964 
0.2355 
sydicatebnk 
0.0984 
0.7893 
0.1345 
0.1801 
0.0659 
0.219 
0.2091 
0.0528 
0.1168 
lic 
0.1345 
0.5169 
0.4018 
0.1423 
0.1234 
0.2211 
0.1395 
0.3078 
0.014 
ipcl 
0.2461 
0.0646 
0.5565 
0.0783 
0.096 
0.6097 
0.0537 
0.066 
0.1204 
iob 
0.0222 
0.7881 
0.185 
0.1728 
0.032 
0.1692 
0.195 
0.155 
0.0542 
lupin 
0.074 
0.0209 
0.087 
0.1185 
0.029 
0.0663 
0.133 
0.2146 
0.7627 
mphasis 
0.7727 
0.1418 
0.2284 
0.1077 
0.189 
0.0668 
0.0975 
0.1934 
0.1142 
mtnl 
0.2197 
0.24 
0.3661 
0.2266 
0.2796 
0.2879 
0.2038 
0.0884 
0.1525 
tvs 
0.333 
0.1517 
0.4456 
0.2657 
0.142 
0.3417 
0.0869 
0.4027 
0.3129 
raymond 
0.3814 
0.2223 
0.1643 
0.6521 
0.1174 
0.284 
0.1333 
0.1873 
0.097 
sterlite 
0.0394 
0.0348 
0.015 
0.0103 
0.1481 
0.078 
0.6185 
0.1373 
0.2609 
indhotel 
0.4449 
0.1327 
0.2314 
0.4201 
0.2344 
0.159 
0.3674 
0.1766 
0.079 
andhrabnk 
0.029 
0.8309 
0.0185 
0.1514 
0.055 
0.2172 
0.0677 
0.0336 
0.1212 
wokhardt 
0.3205 
0.1208 
0.1646 
0.2001 
0.4477 
0.036 
0.0634 
0.071 
0.5227 
containercorp 
0.3052 
0.351 
0.5912 
0.0912 
0.105 
0.2235 
0.0364 
0.1333 
0.1531 
M.P.BIRLA INSTITUTE OF MANAGEMENT 
26 
A Comparison of CAPM & Arbitrage Pricing Theory 

ifci 
0.1546 
0.5029 
0.1895 
0.1119 
0.3214 
0.5123 
0.088 
0.2718 
0.0446 
ibp 
0.0626 
0.068 
0.707 
0.1216 
0.2667 
0.0311 
0.0088 
0.2917 
0.075 
aventis 
0.0667 
0.1766 
0.1107 
0.7191 
0.3854 
0.0608 
0.0214 
0.0295 
0.2683 
nirma 
0.4718 
0.3232 
0.0778 
0.4594 
0.1629 
0.1858 
0.037 
0.1797 
0.04 
satyam 
0.8525 
0.009 
0.1192 
0.1958 
0.1302 
0.1392 
0.005 
0.1124 
0.1026 
hpcl 
0.1486 
0.3387 
0.7454 
0.0759 
0.0033 
0.1508 
0.1522 
0.1575 
0.0274 
brpl 
0.0861 
0.4353 
0.278 
0.278 
0.0182 
0.5112 
0.099 
0.043 
0.1946 
ashokley 
0.3035 
0.292 
0.335 
0.1744 
0.3311 
0.3015 
0.1714 
0.3042 
0.0701 
idbi 
0.0838 
0.4661 
0.2167 
0.2377 
0.195 
0.4995 
0.167 
0.0691 
0.004 
asianpaint 
0.223 
0.2975 
0.1937 
0.4103 
0.2034 
0.093 
0.065 
0.283 
0.0471 
cummin 
0.4206 
0.2973 
0.0968 
0.3296 
0.2734 
0.18 
0.1427 
0.0721 
0.2057 
wipro 
0.8646 
0.0412 
0.0302 
0.0677 
0.2348 
0.0302 
0.06 
0.1207 
0.0887 
m&m 
0.5526 
0.2199 
0.2221 
0.1548 
0.1674 
0.2403 
0.32 
0.1622 
0.0643 
utibnk 
0.4071 
0.5818 
0.1865 
0.2695 
0.2287 
0.0656 
0.1233 
0.0926 
0.0036 
corpbnk 
0.0422 
0.5564 
0.3558 
0.1119 
0.3418 
0.08 
0.2503 
0.0858 
0.1085 
tatamotor 
0.5344 
0.2415 
0.2308 
0.0888 
0.2056 
0.3443 
0.2126 
0.2956 
0.1966 
hindalco 
0.3064 
0.1774 
0.2773 
0.2985 
0.2144 
0.3863 
0.4541 
0.126 
0.067 
apollo 
0.5545 
0.4244 
0.0441 
0.1335 
0.0116 
0.3856 
0.1679 
0.0134 
0.004 
cadila 
0.2017 
0.1191 
0.1149 
0.19 
0.2478 
0.2664 
0.2509 
0.02 
0.7005 
pfizer 
0.1479 
0.2139 
0.1731 
0.7506 
0.1403 
0.1471 
0.0647 
0.1349 
0.1319 
abb 
0.3019 
0.3046 
0.3838 
0.3341 
0.2684 
0.047 
0.4045 
0.0748 
0.065 
acc 
0.4594 
0.085 
0.1405 
0.0942 
0.451 
0.3523 
0.3126 
0.1542 
0.0548 
bajaj auto 
0.3526 
0.0287 
0.2423 
0.1249 
0.1716 
0.402 
0.0705 
0.497 
0.2435 
bhel 
0.3769 
0.3261 
0.3956 
0.1779 
0.2006 
0.1921 
0.4497 
0.091 
0.085 
bpcl 
0.0333 
0.2269 
0.7439 
0.1873 
0.1148 
0.2018 
0.2186 
0.1767 
0.059 
cipla 
0.3515 
0.011 
0.0296 
0.2686 
0.4987 
0.1024 
0.2227 
0.1564 
0.2972 
dr reddy 
0.1357 
0.1521 
0.0598 
0.069 
0.1933 
0.0361 
0.2498 
0.6365 
0.2093 
glaxo 
0.2918 
0.1272 
0.2509 
0.7117 
0.068 
0.0227 
0.2476 
0.0793 
0.2321 
grasim 
0.3283 
0.2614 
0.1701 
0.139 
0.4572 
0.3191 
0.4918 
0.0129 
0.0935 
gujambuja 
0.4697 
0.1383 
0.2286 
0.089 
0.4148 
0.3157 
0.3183 
0.031 
1E04 
hdfc 
0.2083 
0.3353 
0.2119 
0.2615 
0.5461 
0.0074 
0.1649 
0.3592 
0.0189 
herohonda 
0.2679 
0.0625 
0.2227 
0.1688 
0.0766 
0.0137 
0.0776 
0.5234 
0.186 
hind lever 
0.0886 
0.0759 
0.1763 
0.2153 
0.45 
0.0341 
0.2496 
0.5897 
0.044 
icici 
0.2639 
0.4054 
0.3045 
0.2682 
0.0437 
0.1316 
0.3251 
0.2129 
0.105 
infosys 
0.8235 
0.064 
0.0552 
0.0885 
0.2436 
0.0492 
0.0258 
0.0633 
0.012 
itpl 
0.2471 
0.0641 
0.5581 
0.0784 
0.096 
0.6089 
0.0536 
0.063 
0.1156 
itc 
0.2273 
0.1578 
0.1429 
0.426 
0.1449 
0.1315 
0.4743 
0.1018 
0.131 
L N T 
0.4843 
0.0696 
0.1451 
0.3766 
0.2577 
0.2138 
0.3063 
0.2117 
0.212 
Nationalalum 
0.0669 
0.2251 
0.5613 
0.3126 
0.0873 
0.2414 
0.3692 
0.1487 
0.041 
ongc 
0.1522 
0.3323 
0.6777 
0.2532 
0.1248 
0.0138 
0.0132 
0.042 
0.0355 
ranbaxy 
0.1128 
0.3212 
0.1395 
0.172 
0.0901 
0.0692 
0.0999 
0.3332 
0.5853 
reliance 
0.3283 
0.1579 
0.4372 
0.0446 
0.2515 
0.1229 
0.4358 
0.155 
0.149 
M.P.BIRLA INSTITUTE OF MANAGEMENT 
27 
A Comparison of CAPM & Arbitrage Pricing Theory 

sail 
0.1957 
0.3388 
0.0642 
0.0035 
0.2955 
0.7636 
0.0292 
0.0751 
0.0891 

sbin 
0.2277 
0.5972 
0.3049 
0.0992 
0.2383 
0.1285 
0.3136 
0.2027 
0.043 

Rotated 

Coefficients(a) 

Unstandardized 
Standardized 

Model 
Coefficients 
Coefficients 
t 
Sig. 

B 
Std. Error 
Beta 

1 
(Constant) 
0.01908 
0.004277 
4.461336 
3.19E05 

factors 
1 
0.018485 
0.012235 
0.174944 
1.51079 
0.135544 

2 
0.02006 
0.013396 
0.17132 
1.49758 
0.138939 

sun pharma 
0.3444 
0.0208 
0.2377 
0.184 
0.5911 
0.032 
0.1694 
0.1568 
0.3497 

tata power 
0.3582 
0.3368 
0.2897 
0.0924 
0.4172 
0.3573 
0.3759 
0.0245 
0.079 

tata steel 
0.3784 
0.2259 
0.1759 
0.1791 
0.2585 
0.5837 
0.3301 
0.0376 
0.057 

vsnl 
0.2095 
0.0964 
0.3138 
0.2919 
0.4618 
0.1323 
0.2997 
0.02 
0.208 

zeel 
0.6438 
0.2004 
0.1808 
0.1289 
0.2344 
0.196 
0.0272 
0.1532 
0.2042 

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. 

a 
Rotation converged in 14 
iterations. 

Table 3 

Table 4 

3 
0.03 
0.013907 
0.24794 
2.15685 
0.034609 

4 
0.02646 
0.016681 
0.17829 
1.58636 
0.117367 

5 
0.01789 
0.021533 
0.09272 
0.83099 
0.40893 

6 
0.00366 
0.016917 
0.024004 
0.21634 
0.82938 

7 
0.059699 
0.027403 
0.239006 
2.178585 
0.032885 

8 
0.00284 
0.024151 
0.013 
0.11747 
0.906843 

9 
0.00917 
0.019102 
0.05354 
0.48014 
0.632691 

a 
Dependent Variable: VAR00001 

Unrotated 

Coefficients(a) 

Unstandardized 
Standardized 

Model 
Coefficients 
Coefficients 
t 
Sig. 

B 
Std. Error 
Beta 

1 
(Constant) 
0.016539 
0.01043 
1.585734 
0.117182 

factors 
1 
0.00054 
0.01623 
0.00446 
0.0335 
0.973369 

2 
0.01549 
0.020135 
0.08957 
0.76909 
0.444354 

M.P.BIRLA INSTITUTE OF MANAGEMENT 
28 
A Comparison of CAPM & Arbitrage Pricing Theory
3 
0.027614 
0.043689 
0.07837 
0.632049 
0.529357 

5 
0.07144 
0.050484 
0.17545 
1.415 
0.161378 

a Dependent Variable: VAR00001 
BIBLIOGRAPHY
BOOKS
1. Basic Econometrics: By Damodar N. Gujrati
2. Introductory Econometrics: By Ramu Ramanathan
WEBSITES
1. 
www.nseindia.com 
2. 
www.yahoofinance.com 
3. 
www.capitaline.com 
4. 
www.jstor.com 
5. 
www.google.com 
ECONOMETRICS SOFTWARE PACKAGES
1. SPSS
M.P.BIRLA INSTITUTE OF MANAGEMENT
29
A Comparison of CAPM & Arbitrage Pricing Theory
Reference:
Adam Gehr, Jr. "Some Tests of the Arbitrage Pricing Theory." Journal of the Midwest Finance Association (1975), 91105.
Gur Huberman. "Arbitrage Pricing Theory: A Simple Approach." Journal of Economic Theory 28 (1982), 18391.
G. Chamberlain. "Funds, Factors, and Diversification in Arbitrage Pricing Models."
Econometrica 51 (September 1983), 130523.
J. Ingersoll, Jr. "Some Results in the Theory of Arbitrage Pricing." Journal of
Finance 39 (September 1984), 102139.
J. Jobson. "A Multivariate Linear Regression Test for the Arbitrage Pricing
Theory." Journal of Finance 37 (September 1982), 103742.
P. Pfleiderer. "A Short Note on the Similarities and the Differences between the
Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT)." Graduate School of Business Working Paper, Stanford University, 1983.
J. Shanken. "The Arbitrage Pricing Theory: Is it Testable?" Journal of Finance 37 (December 1982), 112940.
M.P.BIRLA INSTITUTE OF MANAGEMENT
30
A Comparison of CAPM & Arbitrage Pricing Theory
M. Jensen, and M. Scholes. "The Capital Asset Pricing Model: Some Empirical Results." In Michael C. Jensen (ed.), Studies in the Theory of Capital Market. New York:
Praeger, 1972, 79121.
M.P.BIRLA INSTITUTE OF MANAGEMENT
31
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