Multifactor Linear Model

Another useful way of explaining the APT is that it relates the returns of security within a multivariate framework in which the return relationships arc linear. Multivariate framework implies that there are a variety of different factors which influence security returns. However. the theory does not specify these factors on the basis of conceptual argument. The argument presumably is that factors may not be the same for all securities. Therefore, the factors to be used in APT model are to be identified empirically; the factor analysis, a statistical method. has been suggested to identify relevant factors,

The factors in the context of APT can be classified into two broad groups, namely, macroeconomic factors having a pervasive influence and micro (firm specific) factor. Viewed from this perspective, the APT model (as shown in equation 3.35) is akin to an extended CAPM model.


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