Question 1) In what significant does the APT differ from CAPM ?
Question 2) Why would an investor wish to form an arbitrage portfolio ?
Question 3) What three conditions define an arbitrage portfolio ?
Question 4. Assuming a one-factor model, consider a portfolio composed of three securities with the following factor sensitivities:
Security --- Factor Sensitivity
1 -- 0.90
2 -- 3.00
3 -- 1.80
If the proportion of security 1 on the portfolio is increased by .2 how must the proportions of the other two securities change if the portfolio is to maintain the same factor sensitivity?