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# Arbitrage Pricing Theory (APT) Definition and Quiz

The original APT and subsequent models advanced thinking from a single-factor (beta) world to a view of return and risk through multiple factors.
1. Define - Define the term Arbitrage Pricing Theory.
2. Context - Use Arbitrage Pricing Theory in a sentence.
3. Quiz - Test yourself.
Updated: February 16, 2021
Once we move into the multi-factor realm it becomes difficult for we humans to visualize more than three dimensions. Learn more below.

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## Arbitrage Pricing Theory (APT) for risk modeling

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. Macroeconomic factors may include changes in oil prices, interest rates, inflation and GNP.

Synonym: APT

For context, instead of using a stock's systematic exposure to the market using one-factor, beta, APT models utilize macroeconomic or fundamental factors. The Fama-French academic factor models and those published by risk model providers like Barra and Axioma, for example, utilize a stock's exposure to other factors like size, style, industry. In the end, this makes risk forecasting more accurate.

### 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.

### Video

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Videos can also be accessed from our YouTube Channel.

### Video Script

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### Quiz

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.

Fundamental factor models are more commonly used in practice than macroeconomic factor models. | True or False?

True. This is likely due to the broad dissemination of the Fama-French model which includes company size and price-to-book factors.

Still unclear on APT Models? Check out the 27-video Excel deep-dive course at Quant 101.

### Related Terms

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stephen ross
multi-factor risk
asset pricing model
macroeconomic factors
chen roll and ross
fundamental factors
stock pricing
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investment risk model
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