The capital asset pricing model (CAPM) extends capital market theory in a way that allows investors to evaluate the risk–return trade-off for both diversified portfolios and individual securities.

Beta can be thought of as indexing the asset’s systematic risk to that of the market portfolio.

CAPM states that only the overall market risk premium matters

Beta is a measure of unsystematic risk

Securities with returns that lie below the security market line are undervalued

Studies have shown the beta is more stable for portfolios than for individual securities

The APT does not require a market portfolio.

A major advantage of the Arbitrage Pricing Theory is the risk factors are clearly and universally identifiable

The APT assumes that security returns are normally distributed

 Multifactor models of risk and return can be broadly grouped into models that use macroeconomic factors and models that use microeconomic factors