

Return, Risk And The Security Market Line  Arbitrage Pricing Theory
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.
The arbitrage pricing theory describes the price where a mispriced asset is expected to be. APT 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 overpriced 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.



Investing Basics
Understanding Arbitrage Pricing Theory
Investors use the arbitrage pricing theory to identify an asset thatâ€™s incorrectly priced. 
Active Trading Fundamentals
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. 
Fundamental Analysis
Capital Asset Pricing Model  CAPM
CAPM is a model that describes the relationship between risk and expected return. 
Professionals
Asset Pricing Models
Asset Pricing Models 
Investing
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
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. 
Fundamental Analysis
The Capital Asset Pricing Model: An Overview
CAPM helps you determine what return you deserve for putting your money at risk. 
Trading Strategies
Arbitrage and Pairs Trading
At a basic level, arbitrage is the process of simultaneously buying and selling the same (or equivalent) securities on different markets to take advantage of price differences and make a profit. ... 
Fundamental Analysis
Taking Shots At CAPM
Find out why many investors think the capital asset pricing model is full of holes. 
Options & Futures
Financial Concepts: Capital Asset Pricing Model (CAPM)
Pronounced as though it were spelled "capm", this model was originally developed in 1952 by Harry Markowitz and finetuned over a decade later by others, including William Sharpe. The capital ...

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 ... 
Basis Trading
An arbitrage trading strategy that aims to profit from perceived ... 
Market Arbitrage
Purchasing and selling the same security at the same time in ... 
Convertible Bond Arbitrage
An arbitrage strategy that aims to capitalize on mispricing between ... 
Statistical Arbitrage
A profit situation arising from pricing inefficiencies between ...

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 difference between arbitrage and speculation?
Arbitrage and speculation are very different strategies. Arbitrage involves the simultaneous buying and selling of an asset ... 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 skills should I acquire to take advantage of arbitrage trading?
Understand what arbitrage trading involves and what the necessary skill set is that a trader must develop in order to master ... Read Answer >> 
How do I use the news to find arbitrage opportunities?
Learn what risk arbitrage trading is and how this type of arbitrage trading opportunity is available to individual retail ... Read Answer >>