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Alternative Investments and Arbitrage Pricing Theory (APT)Arbitrage Pricing Theory: If one knows the make-up of a target Alternative Investment Portfolio, for example if you know the asset class, geography, industry distribution, leverage, etc. then a portfolio can be created that has the same risk/return characteristics as the target portfolio and there fore it should be priced equivalently.
If you are interested in learning more about Topic 820 (formerly FAS 157), you can download a Topic 820 white paper here. You can speak with a DerivActiv expert about alternative investment portfolio replication by calling: 1-866-200-9012. Alternative Investments and APT - The Law of One Price The fundamental foundation for the arbitrage pricing theory is the law of one price, which states that two identical items will sell for the same price, for if they do not, then a no-risk profit could be made by arbitrage—buying the item in the cheaper market then selling it in the more expensive market. Another implication of the law of one price used in the arbitrage pricing theory is that even if they are not identical—items should cost the same if their return and risk are identical. The justification for this is that the only reason that a financial instrument is purchased is to earn a return for a certain amount of risk—no other aspect of the financial instrument matters. Hence, the law of one price requires that any two financial instruments or portfolios that have the same return-risk profile should sell for the same price. If this is not true, then a profit could be made by selling the security or portfolio with the lower return short, and buying the higher return portfolio. A direct translation in to the Alternative Investment space is the following statement, "If one knows the fund objective, fund management style, geographic focus, asset classes, industry distribution and leverage of a target AI portfolio then a portfolio can be created that has the same risk/return characteristics as the target portfolio and therefore should be priced equivalently." |
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Topic 820 Arbitrage Theory Topic 820 Due Diligence Topic 820 Porfolio Replication Topic 820 Porfolio Valuation Topic 820 Alternative Investments Topic 820 Valuation Topic 820 Investment Services Topic 820 Factor Loadings Topic 820 Fair Value Services Topic 820 Alternative Investments Topic 820 Verification |
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