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The Arbitrage Pricing Theory: Estimation and Applications


The pricing equation of Ross' (1976) APT model is derived using estimable parameters. Estimation errors are discussed in the framework of elementary perturbation analysis. Theoretically, a simple link is provided among the mean-variance efficient set mathematics, mutual fund separations, discrete and continuous time CAPM, option pricing model, term structure of interest rate, capital budgeting, portfolio ranking, Modigliani Miller theorems with the APT.

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