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The APT, the CAPM, and the Barra Model

categories: PMA, Equities, Asset Pricing and Valuation, Research Paper, GRINOLD Richard, general

How does Barra's model of asset risk fit the APT and CAPM models? The APT and the CAPM are models of expected return. The CAPM is specified in a quite explicit way. The APT requires less in the way of assumptions than the CAPM, and is not explicit about actual implementation. The Barra model is designed to help investment managers forecast and control risk. It's a risk model as opposed to an expected return model. Nevertheless, the Barra model does have the same algebraic structure required for the APT; thus, one can use the Barra model as a model of expected returns.  In a subsequent article we will distinguish between factors that are selected to explain expected return and factors that are used to explain and predict volatility. Sometimes they are the same, but more often than not they are quite different