DEFINITION of 'Arbitrage Pricing Theory  APT'
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.
VIDEO
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.

Alpha
Alpha is used in finance to represent two things: 1. a measure ... 
Fama And French Three Factor Model
A factor model that expands on the capital asset pricing model ... 
Model Risk
A type of risk that occurs when a financial model used to measure ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
Beta
Beta is a measure of the volatility, or systematic risk, of a ... 
Consumption Capital Asset Pricing ...
A financial model that extends the concepts of the capital asset ...

Investing Basics
Understanding Arbitrage Pricing Theory
Investors use the arbitrage pricing theory to identify an asset that’s incorrectly priced. 
Fundamental Analysis
Catch On To The CCAPM
The consumption capital asset pricing model smoothes over some of CAPM's weaknesses to make sense of risk aversion. 
Options & Futures
Calculating The Equity Risk Premium
See the model in action with real data and evaluate whether its assumptions are valid. 
Fundamental Analysis
The EquityRisk Premium: More Risk For Higher Returns
Learn how the expected extra return on stocks is measured and why academic studies usually estimate a low premium. 
Options & Futures
Financial Concepts
Diversification? Optimal portfolio theory? Read this tutorial and these and other financial concepts will be made clear. 
Mutual Funds & ETFs
What Exactly Are Arbitrage Mutual Funds?
Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets. 
Investing Basics
What Does In Specie Mean?
In specie describes the distribution of an asset in its physical form instead of cash. 
Economics
Calculating Cross Elasticity of Demand
Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another. 
Fundamental Analysis
Emerging Markets: Analyzing Colombia's GDP
With a backdrop of armed rebels and drug cartels, the journey for the Colombian economy has been anything but easy. 
Fundamental Analysis
Emerging Markets: Analyzing Chile's GDP
Chile has become one of the great economic success stories of Latin America.

Is there a difference between financial spread betting and arbitrage?
Financial spread betting is a type of speculation that involves a highly leveraged derivative product, whereas arbitrage ... Read Full Answer >> 
What is the utility function and how is it calculated?
In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >> 
Why do companies enter into futures contracts?
Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >> 
What are the goals of covered interest arbitrage?
The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >> 
How can an investor profit from a fall in the utilities sector?
The utilities sector exhibits a high degree of stability compared to the broader market. This makes it bestsuited for buyandhold ... Read Full Answer >> 
How can I use a regression to see the correlation between prices and interest rates?
In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>