FRM 6. The Arbitrage Pricing Theory and Multifactor Models of Risk and Return: LOs

a) Explain the Arbitrage Pricing Theory (APT), describe its assumptions, and compare the APT to the CAPM.

b) Describe the inputs (including factor betas) to a multifactor model and explain the challenges of using multifactor models in hedging.

c) Calculate the expected return of an asset using a single-factor and a multifactor model.

d) Explain how to construct a portfolio to hedge exposure to multiple factors.

e) Describe and apply the Fama-French three-factor model in estimating asset returns.