The correct answer is: D. Both A and B
Arbitrage pricing theory (APT) is a general equilibrium theory of asset pricing that asserts that the expected return of a security is a linear function of a number of factors, including the market factor and a number of firm-specific factors.
The market factor is a measure of the overall riskiness of the market, and the firm-specific factors are measures of the riskiness of the individual firm. The beta of a security is a measure of its sensitivity to the market factor, and the alpha of a security is a measure of its excess return over the expected return given its beta.
APT is a more general theory than the capital asset pricing model (CAPM), which only considers the market factor. APT can be used to explain why some stocks have higher expected returns than others, even after controlling for their betas.
Option A: dividend policy is not a factor in APT. APT is a theory of asset pricing, and dividend policy is a decision made by the firm’s management. APT assumes that the firm’s management will make decisions that maximize the firm’s value, and that the firm’s value will not be affected by the firm’s dividend policy.
Option B: market risk is a factor in APT. The market factor is a measure of the overall riskiness of the market, and the beta of a security is a measure of its sensitivity to the market factor.
Option C: historical policy is not a factor in APT. APT is a theory of asset pricing, and historical policy is a measure of the firm’s past performance. APT assumes that the firm’s past performance is not a good predictor of its future performance.