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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.
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.
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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False, three independent and one dependent variable.
True. This is likely due to the broad dissemination of the Fama-French model which includes company size and price-to-book factors.
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