Foundation of Risk Management -- Part 1 - Financial Risk Manager Video Lecture | Risk Management: An Essential Training

simply learn your pace your place
financial risk manager frm par one the
frm exam covers the fundamental tools
and techniques used in risk management
and the theories that underlie their use
arbitrage pricing theory welcome to the
seventh lecture in the preparation of
frm part 1 exam in this lecture we will
study a relatively new pricing model
based on our brokerage apt or the
arbitrage pricing theory or the
arbitrage pricing model it is a pricing
model based on concept of our porridge
our patridge is used to define a
situation where one can earn riskless
profit by entering into to reverse
trades at one time such an opportunity
does not exist for long as investors
will act to quickly drive away such
opportunity as such an equilibrium
arbitrage opportunity does not exist
this model also overcomes some
shortcomings of the capm as it is a
multi-factor model and does not need to
depend on the market return here we can
use multiple risk factors that drive
asset prices to arrive at the apertured
free price of the asset
agenda will begin a discussion with the
assumptions underlying the operative
pricing theory based on these
assumptions we will derive the
mathematical expression for the model
and then we will see how it compares to
the capm finally we will see the
applications of apt in passive and
active investment management assumptions
let us begin with the first assumption
of apt there is no opportunity for
arbitrage and equivalent assets that
give the same return and have similar
risk cannot be sold at different prices
as investors will quickly act to
generate the riskless profit and drive
away the opportunity for example if the
same security is selling at twenty
dollars and twenty-five dollars at two
different places then immediately
investors will purchase at twenty
dollars and sell at $25 at the same time
thus earning a riskless profit of five
dollars in the second assumption the
returns are dependent on multiple risk
factors and dependence on just market
risk as in capm is not necessary also as
in capm the unsystematic risk can be
diversified away and the investor is
rewarded only for bearing the systemic
risk