Arbitrage Pricing Theory (APT)
What is Arbitrage Pricing Theory (APT)? Arbitrage Pricing Theory (APT) is a multi-factor asset pricing model that predicts the return of a financial asset based on various macroeconomic, industry-specific, and company-specific factors. Unlike CAPM, which relies on a single market risk factor (beta), APT considers multiple risk factors that affect asset prices. By incorporating various influences such as inflation rates, GDP growth, and changes in interest rates, APT provides a more dynamic and realistic approach to understanding how assets perform in different economic conditions. Learn more about investment strategies . Key Assumptions of Arbitrage Pricing Theory Multiple Risk Factors : APT assumes that asset returns are influenced by various risk factors, such as inflation, interest rates, GDP growth, and company-specific events. No Arbitrage Opportunity : Investors cannot generate risk-free profits through arbitrage in an efficient market. Linear Relationship : The relationshi...