Build a Better Process

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.
face pic by Paul Alan Davis, CFA
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.

Outline Back Tip Next

/ factorpad.com / fin / glossary / arbitrage-pricing-theory.html

An ad-free and cookie-free website.

Arbitrage Pricing Theory (APT) for risk modeling


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.


Many terms have 4-5 minute videos showing a derivation and explanation. If this term had one, it would appear here.

Videos can also be accessed from our YouTube Channel.

Video Script

If this term had a video, the script would be here.


Click box for answer.

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.

Questions or Comments?

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

Related Terms

Our trained humans found another term in the category academic works you may find helpful.

What's Next?

Subscribe to both YouTube and the email list so when we post a video on APT you are notified.

Outline Back Tip Next

/ factorpad.com / fin / glossary / arbitrage-pricing-theory.html

arbitrage pricing theory
apt model
stephen ross
multi-factor risk
asset pricing model
macroeconomic factors
chen roll and ross
fundamental factors
stock pricing
third party risk models
risk models
stock risk modeling
investment risk model
model risk
optimization model

A newly-updated free resource. Connect and refer a friend today.