An Asset-Pricing Theory Unifying the CAPM and APT.

This study shows that the competitive equilibrium version of the arbitrage pricing theory may be extended to develop an exact mode l if idiosyncratic risks obey the Ross separating distribution. The r esults indicate that one only need add the market portfolio as an ext ra factor to the factor model in order to obtain an exact asset prici ng relation. The "empirical" arbitrage pricing theory is also general ized to allow for some factors to be omitted from the econometric m odel employed to test the theory. The importance of the market portfo lio is shown to be a monotonic increasing function of the number of o mitted factors. Copyright 1988 by American Finance Association.