Arbitrage Pricing Theory


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Arbitrage Pricing Theory (APT)

An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on arbitrage arguments. The APT implies that there are multiple risk factors that need to be taken into account when calculating risk-adjusted performance or alpha.

Arbitrage Pricing Theory

A pricing model that seeks to calculate the appropriate price of an asset while taking into account systemic risks common across a class of assets. The APT describes a relationship between a single asset and a portfolio that considers many different macroeconomic variables. Any security with a price different from the one predicted by the model is considered mispriced and is an arbitrage opportunity. An investor may use the arbitrage pricing theory to find undervalued securities and assets and take advantage of them. The APT is considered an alternative to the capital asset pricing model.

arbitrage pricing theory

A mathematical theory for explaining security values that holds that the return on an investment is a function of the investment's sensitivity to various common risk factors such as inflation and unemployment.
References in periodicals archive ?
An Empirical Examination of the Arbitrage Pricing Theory Using Japanese Data," Working Paper, University of California, San Diego, 1988.
He brings a very impressive background to the Director of Financial Engineering position, with over 15 years of experience in derivatives pricing, hedging, arbitrage pricing theory, multi-factor modeling, economic forecasting, risk management, and portfolio optimization.
This tutorial examines in detail the arbitrage pricing theory (APT) model, introduced by Stephen Ross in 1976 as a different equilibrium model that relaxes many of the assumptions of CAPM.