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 ?
The research conducted for the book, using an arbitrage pricing model of market returns, identifies pricing behaviour consistent with "noise trading" and emphasizes the importance of improving securities regulations to enhance investor confidence (p.
Eighty-five percent of respondents use the Capital Asset Pricing Model (CAPM); only 4 percent use the Dividend Discount Model (DDM), and 2 percent use the Arbitrage Pricing Model (APM).
While arbitrage is recognized as a very pervading principle in economics, especially financial economics, it has been used mainly in option pricing [Black and Scholes, 1975] and the Arbitrage Pricing Model [Ross, 1976].
One approach which has been gaining popularity is the arbitrage pricing model, which is formula-driven and based on various risk relationships.
As noted above, the taxpayer's appraiser in Lehman utilized the discounted cash flow approach, which is a less sophisticated model than the arbitrage pricing model.
This paper tests the importance of income uncertainty in the context of a measured factor arbitrage pricing model.
1) Mention should also be made of the arbitrage pricing model as applied to fair insurance pricing by Kraus and Ross (1982).
Moreover, (13) and (14) demonstrate how the international arbitrage pricing model translates risk and the price of risk internationally.
The question of appropriate risk measures is addressed by presenting two standard financial market models relating risk and return: the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Model (APM).
Nonetheless, dissatisfaction with the CAPM has led researchers to explore the Arbitrage Pricing Model (APM) as an alternative risk-return model.