What is the 'Arbitrage Pricing Theory  APT'
The arbitrage pricing theory (APT) is an asset pricing model based on the idea that an asset's returns can be predicted using the relationship between that same asset and many common risk factors. Created in 1976 by Stephen Ross, this theory predicts a relationship between the returns of a portfolio and the returns of a single asset through a linear combination of many independent macroeconomic variables.
BREAKING DOWN 'Arbitrage Pricing Theory  APT'
The arbitrage pricing theory (APT) describes the price where a mispriced asset is expected to be. It is often viewed as an alternative to the capital asset pricing model (CAPM), since the APT has more flexible assumption requirements. Whereas the CAPM formula requires the market's expected return, APT uses the risky asset's expected return and the risk premium of a number of macroeconomic factors. Arbitrageurs use the APT model to profit by taking advantage of mispriced securities. A mispriced security will have a price that differs from the theoretical price predicted by the model. By going short an over priced security, while concurrently going long the portfolio the APT calculations were based on, the arbitrageur is in a position to make a theoretically riskfree profit.

Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
International Capital Asset Pricing ...
A financial model that extends the concept of the capital asset ... 
Market Arbitrage
Purchasing and selling the same security at the same time in ... 
Statistical Arbitrage
A profit situation arising from pricing inefficiencies between ... 
Anomaly
A term describing the incidence when the actual result under ... 
Cost Of Equity
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Trading
Understanding Arbitrage Pricing Theory
Investors use the arbitrage pricing theory to identify an asset that’s incorrectly priced. 
Trading
Arbitrage Pricing Theory: It's Not Just Fancy Math
What are the main ideas behind arbitrage pricing theory? We provide a simple explanation of the model and how to use it. 
Investing
Capital Asset Pricing Model  CAPM
CAPM is a model that describes the relationship between risk and expected return. 
Investing
The Capital Asset Pricing Model: An Overview
CAPM helps you determine what return you deserve for putting your money at risk. 
Investing
The Capital Asset Pricing (CAPM) Model: Pros and Cons
CAPM, while criticized for its unrealistic assumptions, provides a more useful outcome than either the DDM or WACC in many situations. 
Trading
Why Is Arbitrage Trading Legal?
Not only is arbitrage legal in the US and most developed countries, it can be beneficial to the overall health of a market. 
Investing
Taking Shots At CAPM
Find out why many investors think the capital asset pricing model is full of holes. 
Trading
Valuation Models: Apple’s Stock Analysis With CAPM
The capital asset pricing model, or the CAPM, estimates the expected return of an asset based on the systematic risk of the asset’s return. 
Trading
Reduce Your Risk With ICAPM
Avoid unnecesary risks involved in CAPM calculations by also incorporating ICAPM into the mix. 
Investing
Is Apple's Stock Over Valued Or Undervalued?
Despite several drawbacks, the CAPM gives an overview of the level of return that investors should expect for bearing only systematic risk. Applying Apple, we get annual expected return of about ...

What is arbitrage pricing theory?
Find out what arbitrage pricing theory is and how it can theoretically be used by investors to generate riskfree profit ... Read Answer >> 
What models should I use to make arbitrage trades?
Learn about different types of arbitrage models and techniques, and discover why classic arbitrage opportunities are very ... Read Answer >> 
What is the formula for calculating the capital asset pricing model (CAPM)?
Learn about the capital asset pricing model, or CAPM, and how this formula is used to determine the expected rate of return ... Read Answer >> 
What is the difference between arbitrage and speculation?
Arbitrage and speculation are very different strategies. Arbitrage involves the simultaneous buying and selling of an asset ... Read Answer >> 
How accurate is the equity risk premium in evaluating a stock?
Learn about the drawbacks of using the equity risk premium to evaluate a stock, and understand how it is calculated using ... Read Answer >> 
How is the Capital Asset Pricing Model (CAPM) represented in the Security Market ...
Learn about the capital asset pricing model and the security market line and how the model is used in the calculation and ... Read Answer >>