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Arbitrage Pricing Theory (APT) definition

The Arbitrage Pricing Theory and subsequent models advanced thinking from a single-factor (beta) world to a view of return and risk through multiple factors.

Intermediate

Arbitrage Pricing Theory (APT) is a multi-factor asset pricing theory using various macroeconomic factors. The theory was first postulated by Stephen Ross in 1976 and is the basis for many third-party risk models.


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Quiz

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In a three-factor APT model, there are three dependent variables and one independent variable. | True or False?

False, three independent and one dependent variable

In a Sentence

Joe:  I loved your APT  lecture professor. Will you share a non-Finance multi-factor example?
Doc:  To predict final grades, based on test scores, and worthwhile class participation.

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Keywords:
Arbitrage Pricing Theory
APT
Stephen Ross
multi-factor
asset pricing model
macroeconomic factors
fundamental factors
statistical factors
stock pricing
risk models
regression