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Provide a 4 pages analysis while answering the following question: The Role of the Arbitrage Pricing Theory in Modern Portfolio Management. Prepare this assignment according to the guidelines found in
Provide a 4 pages analysis while answering the following question: The Role of the Arbitrage Pricing Theory in Modern Portfolio Management. Prepare this assignment according to the guidelines found in the APA Style Guide. An abstract is required. Thereafter the effects on smaller securities will be masked by those of larger portfolio. (Gruber 26).
This is not to imply that returns will increase with sensitivity to the said factors. Because some factor that is prices cannot be diversified yet are persuasive, they will definitely affect the price returns as opposed to those that are unpriced yet can be diversified. Therefore the distinction of priced and unpriced factors defines the first role of APT in portfolio management. An example of this role in deciding to buy steels that are not persuasive to current prices is for the APT manager to decide how to buy knowing they will not get extra returns. (Gruber 26), (Anonymous 337 – 352)
Secondly, the manager must ensure that there is enough knowledge of choosing steel stocks to cover the extended risks and must also ensure that this risk is spread across several securities. Thus, the APT process must guarantee trade-offs as prices make returns sensitive. This means that there is neither a good or bad decision, rather, risk-return aim are the most guiding factors. (Gruber 26).
Therefore by use of Arbitrage Pricing Theory, the management will lay out a portfolio that considers several factors of influence under the prevailing market conditions. Thereafter priced risks will persuade the investor to take the greatest risk similar to CAPM. Risk will vary with the sensitivity of the influences. However, the market portfolio has no significant role in the decision of market performance. (Gruber 27).
Hypothesis: Whenever the CEO of a company retires, an excess return can be made by buying the company’s stock.
This hypothesis can be tested by research into the retirement of the famous CEO of companies that are listed in the stock exchange markets. Examples of key CEOs who have retired are Lee Raymond from Exxon Mobil (XOM), John Kanas from North Folk Bancorp, Robert Nardelli from Home Depot, Stan O’Neal from Merrill Lynch. .  .
