Introduction

In the financial markets, the level of reward compared to risk help investors measure the
investment returns. Jack Treynor, William F. Sharpe, John Lintner, and Jan Mossin in the 1960s
developed the Capital Asset Pricing Model (CAPM) to calculate asset’s return in relation to the
risk taken. In 1976, the Arbitrage pricing theory (APT) which is an alternative to the CAPM was
introduced by Stephen Ross it states that there exists a linear relationship between an asset’s
expected return and the macroeconomic factors associated with its risks.
A description of the differences between the CAPM and the APT
- Factors taken into account during the calculation: The key differences between the
CAPM and the APT is that the CAPM considers only one factor which is the expected
market return this makes it simple to use when pricing asset meanwhile the APT has
multiple macroeconomic and/or company-specific factors with no insight into what this
factor could be thus users have to analyze and determine factors that could affect the
returns.
- Time used in determining asset price: Computing the CAPM uses less time since we use
one beta and one factor. Meanwhile the APT requires more time since we need to
determine and quantify factors and later calculate the different beta to use in relation to
those factors.
- Result accuracy: Due to a lot of assumptions and fewer factors, the CAPM turn to be less
accurate meanwhile the APT which is not only an alternative but an extension of the
CAPM has more factor which is equivalent to more accurate pricing.
- Ease of use and practicality: the only factor to consider when calculating the CAPM is
the market risk premium which is easy to calculate and more practical since the market
keeps changing fast. On the other hand, the APT take time when computing the beta
and risk associated with each factor accuracy may not be practical to give the ever-
changing aspects of the market and the factors themselves.
An argument that presents the model I will choose between CAPM and APT
While both models are used to price an asset, I will choose the APT in the pricing of assets since
it’s a combination of many factors that make an investment risky and these factors can be both
macroeconomic and company-specific which are very important when pricing an asset and
should be included. For a single asset, accuracy is a priority. (Corbett). Also, APT has proven
to be more accurate and gives more reliable results as compared to CAPM. (Samarakoon)
Since APT takes into account multiple factors, if i have access to relevant information on the
factors then I will use them to construct an APT model that can be used to price an asset since it
will be more accurate. 
Conclusion
For single assets, APT should be preferred while a portfolio can use CAPM on individual assets to
avoid multiple calculations. CAPM is relatively easy to calculate so computing it first, and
evaluating if it is good is a good starting point then you can continue to evaluate the APT. CAPM
and the APT model are complementary models that complete each other.
Reference
-Investopedia stock analysis - valueclick: CAPM vs. arbitrage pricing theory: Knowing the
difference (2019). . Chatham: Newstex. Retrieved from https://search.proquest.com/blogs,-
podcasts,-websites/investopedia-stock-analysis-valueclick-capm-vs/docview/2184914824/se-2?
accountid=196966
 -Corbett, Aidan. “CAPM Vs APT. Which One Is Right For You? | Kubicle Blog”. Kubicle.Com ,
2018.
-“Comparing The Arbitrage Pricing Theory And The Capital Asset Pricing Model”. Second Hand
Words , 2020.