Capital Asset Pricing Model Versus Arbitrage Pricing Theory

Abstract

: Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) have been a major challenge for economic theorists and practitioners for decades. Unlike the well-documented contribution of these models to understanding the relationship between return and risk and valuing assets on the capital market in developed countries of the world, literature on the topic of the CAPM and APT models is relatively poor in the Republic of Serbia. This creates the need to process this issue in order to at least partially mitigate the insufficiency of domestic literature in this field. In this regard, the subject of research is a comparative analysis of the CAPM and APT models, with the inevitable critical review of these models and emphasizing their positive and negative aspects. The aim of the research is to find answers to the questions which of these models is superior and which corresponds more to reality. By presenting the realistic theoretical and practical range of CAPM and APT models, it was concluded that neither of the these models is perfect and we can not talk about the general superiority of one or the other model, as both models contain equally serious imperfections that prevent them to accurately evaluate the assets. Indeed, the APT model achieves preponderance over the CAPM model in a theoretical, but not in a practical view. Practitioners still prefer to use the CAPM model, while the APT model is more useful in academic circles as theoretical construction with insufficient use in practice. The general conclusion and, at the same time, the main result of the research is that the APT model is the theoretical winner, and the CAPM model is the winner in practice. Due to the equal complexity of the problems that these models face, significant efforts have been made in empirical research and theoretical discussions to improve their accuracy and applicability. However, half a century of research was not enough to eliminate the imperfection of the CAPM and APT models, which does not reduce their significance as the starting point for the development of more advanced equilibrium models of asset valuation in the future.