Chartered Financial Analyst (CFA) Practice Exam Level 2

Which of the following factors is NOT included in the sensitivities of expected returns according to APT?

1. Inflation

2. Unemployment rates

3. Economic Growth

4. Interest Rates

The correct answer is: Unemployment rates

The Capital Asset Pricing Model (CAPM) provides a way to understand how various macroeconomic factors influence the expected returns of an asset. However, the Arbitrage Pricing Theory (APT) takes a broader approach by analyzing multiple systematic risk factors that could affect asset pricing. In the context of APT, the correct response highlights that unemployment rates do not directly influence the sensitivities of expected returns as identified within the framework of APT. The factors that are typically considered include inflation, economic growth, and interest rates, all of which are directly linked to the performance of financial markets and investor behavior. Inflation affects purchasing power and can influence interest rates; economic growth is tied to the overall performance and profitability of firms; while interest rates impact the cost of borrowing and the valuation of future cash flows. Each of these factors has a clear, quantifiable relationship with expected returns, making them fundamental variables within the APT structure. Unemployment rates, while an important economic indicator, are generally viewed as a lagging indicator and may not have as direct an impact on the expected returns as the other factors. The relationship between unemployment and investment returns is more complex and less predictable, placing it outside the core considerations of APT when assessing sensitivities of expected returns.