precluded. If you compare equations 11.3 and 11.6, you will see that equation 11.6 is simply a generalization of the one-factor SML. Finally, the extension of the multifactor SML of equation 11.6 to individual assets is pre- cisely the same as for the one-factor APT. Equation 11.6 cannot be satisfied by every well- diversified portfolio unless it is satisfied by virtually every security taken individually. This establishes a multifactor version of the APT. Hence the fair rate of return on any stock with 1 .5 and 2 .75 is 13%. Equation 11.6 thus represents the multifactor SML for an economy with multiple sources of risk. III. Equilibrium In Capital Markets 11. Arbitrage Pricing Theory The McGraw−Hill Companies, 2001           334 PART III Equilibrium in Capital Markets       CONCEPT C H E C K ☞ QUESTION 5 Find the fair rate of return on a security with 1 .2 and 2 1.4.       One shortcoming of the multifactor APT is that it gives no guidance concerning the de- termination of the risk premiums on the factor portfolios. In contrast, the CAPM implies that the risk premium on the market is determined by the markets variance and the aver- age degree of risk aversion across investors. As it turns out, the CAPM also has a multi- factor generalization, sometimes called the intertemporal (ICAPM). This model provides some guidance concerning the risk premiums on the factor portfolios. Moreover, recent theoretical research has demonstrated that one may estimate an expected return-beta rela- tionship even if the true factors or factor portfolios cannot be identified.       SUMMARY 1. A (risk-free) arbitrage opportunity arises when two or more security prices enable in- vestors to construct a zero net investment portfolio that will yield a sure profit. 2. Rational investors will want to take infinitely large positions in arbitrage portfolios re- gardless of their degree of risk aversion. 3. The presence of arbitrage opportunities and the resulting large volume of trades will cre- ate pressure on security prices. This pressure will continue until prices reach levels that preclude arbitrage. Only a few investors need to become