Suppose the riskless return is 5 per cent and the market portfolio’s expected return (r,) is 11 per cent. Assume further that beta coefficients for security 1.3 (in relation to market portfolio, (in relation to growth rate of GOP) and (in relation to inflation), The expected growth rate in GOP is 8 per cent and inflation is 3 percent / Determine the expected return of security i.
Though the APT is intuitively appealing, it is difficult to be applied in practice, For instance, the identification of the relevant factors (not specified in the APT model) itself the formidable task. Moreover, the relative importance of the factors (identified) may change over time. Because of these difficulties, the researchers have found difficulties in testing the APT. As a result, there is a lack of practical acceptance of APT. In other words, the superiority of the APT to the CAPM has not been conclusively established or rice-versa. Both models involve expectations of risks and d returns which need to be estimated and these’ estimates are subject to wide error”.