A fundamental equity fund manager is considering switching from a CAPM-based valuation framework to an Arbitrage Pricing Theory (APT) framework to better capture macroeconomic nuances. However, the manager is hesitant due to implementation challenges. Which of the following represents the most significant practical disadvantage of adopting APT compared to CAPM?

Question

Accepted Answer

A primary disadvantage of APT is that it is a structural framework that does not prescribe the specific factors to use. Managers must use historical data and regression analysis to identify relevant factors (e.g., inflation, yield curve), which introduces ambiguity and complexity compared to CAPM's single market factor.

Discussion