Portfolio efficiency of APT and CAPM in two Scandinavian stock exchanges

Abstract

In the paper we apply a Markowian Super Criterion for testing the Portfolio Efficiency of the Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM). The competing Capital Market Theories are tested with Finnish and Swedish weekly price index data over the 1970–1987 time frame. We demonstrate that the APT dominates the CAPM in both countries. The multifactor APT is more powerful in predicting Finnish than Swedish stock returns, whereas the contrary holds for the single factor CAPM. A considerable deviation between the expected Pareto frontier and the best expectational frontier of the APT is observed in both markets.