Which of the statements is/are false regarding Arbitrage Pricing Theory (APT)?I. APT assumes that return on any asset can be expressed as a linear function of a set of market factors or indexes. II. The arbitrage price line indicates relation between unsystematic risk and the expected return of an asset. III. While deriving the APT model, APT assumes that the error term can be reduced to zero through appropriate diversification.

Question:

Which of the statements is/are false regarding Arbitrage Pricing Theory (APT)?I. APT assumes that return on any asset can be expressed as a linear function of a set of market factors or indexes. II. The arbitrage price line indicates relation between unsystematic risk and the expected return of an asset. III. While deriving the APT model, APT assumes that the error term can be reduced to zero through appropriate diversification.

A.

Only (I) above

B.

Only (II) above

C.

Only (III) above

D.

Both (I) and (II) above

Answer» b. Only (II) above

Note: The above multiple-choice question is for all general and Competitive Exams in India