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 ?
"Sequential Tests of the Arbitrage Pricing Theory: A Comparison of Principal Components and Maximum Likelihood Factors", Journal of Finance, Vol.
"International Arbitrage Pricing Theory." Journal of Finance, May 1983, 449-57.
Chang, 1990, "The Pricing of Futures Contracts and the Arbitrage Pricing Theory", Journal of Financial Research, 13:297-306
Valuation of the firm can be done through several theoretical models such as the Gordon Dividend Growth Model, the Capital Asset Pricing Model (CAPM), and the Arbitrage Pricing Theory model (APT).
Solnik (1983) extended the arbitrage pricing theory to an international framework.
They use the Arbitrage Pricing Theory (APT) framework to estimate the hedge fund portfolios' alphas over two independent holding periods.