Major Pricing Theories - Assignment Example

The hypothesis is not true since the model explains that the returns of a security or that of a portfolio are equal to the rate of a risk-free security and its risk premium. In the model, when the expected returns do not meet the expected returns, then the investment should not be undertaken. For this reason, Capital Asset Price Model focuses on price and investment.

Arbitrage Pricing Theory is a model that bases its idea that the returns of an asset can be predicted using the relationship that exists between the asset and the common risk factors. This theory also defines the price where an asset that is not well-priced is likely to be. The model is always viewed as a substitute for capital asset pricing classical. For this reason, Arbitrage Pricing Theory is a model that has a more elastic assumption requirement (Hodrick, Ng, and Song Mueller, 76).

The multi-Factor Model of Risk and Return is a financial model based on multiple factors. The multiple factors occur during its computation when explaining the market phenomenon and equilibrium’s asset prices. The factor can be used in explaining either an individual security or a portfolio of securities. The model achieves such an objective by comparing two or more factors in analyzing the relationship between variables and the resulting performance of the securities.

The Capital Asset Price Model is a model that describes the relationship that occurs between the expected returns and the risks that are involved. On the other hand, Arbitrage Pricing Theory is a model that is based on the idea that the returns of an asset can be predicted using the relationship that exists between the asset and the common risk factors. The multi-factor model is based on multiple factors during its computation when explaining market phenomena and equilibrium asset prices.

This is an international bond that is issued in a foreign country whose value is stated in their respective currency. Eurobonds are issued by international organizations and categories according to the currency in which they are dominated.

Common stocks are considered the most mutual type of stock that is issued by companies and enable shareholders to contribute to the growth and profit of the company they invest in.  Preferred stocks are those that vary in value depending on the features and terms that are applied to them (Hodrick, Ng, and Sengmueller, 84).

Future contracts are contractual agreement that is mainly made on the trading floor of a futures exchange. This is involved buying and selling a particular commodity or financial instrument in the future.

This is a contract that derives the value that it has in the performance of underlying identities. The underlying identities include an index, interests, or an asset.

This is a security that sells like a stock on major exchanges that involves investing in real estate directly. This is done through mortgages and properties.