Arbitrage Pricing Theory

Knowledge Center

   

Description of Arbitrage Pricing Theory. Explanation.

Contents

Premium

 

Definition Arbitrage Pricing Theory. Description.


Arbitrage Pricing Theory (APT) is an alternative model to the Capital Asset Pricing Model (CAPM). It was developed by economist Stephen Ross in 1976 and is based purely on arbitrage arguments. It is an equilibrium model of stock returns in which returns are specified to be a linear function of possibly many factors, in contrast to the CAPM, in which returns are specified to be a linear function of one factor, the systematic (non-diversifiable) risk.


Arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets and thereby making a risk free profit.


APT holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors, where sensitivity to changes in each factor is represented by a factor specific beta coefficient. The model derived rate of return will then be used to price the asset correctly - the asset price should equal the expected end of period price discounted at the rate implied by model. If the price diverges, arbitrage should bring it back into line.


Arbitrage Pricing Special Interest Group


Special Interest Group (23 members)


Arbitrage Pricing Forum  

Recent topics

  Arbitrage Pricing Theory Example      
 
  Arbitrage Pricing Theory      
 

Best Practices - Arbitrage Pricing

Expert Tips - Arbitrage Pricing



Advance yourself in business administration and management



Resources - Arbitrage Pricing
 

News about Arbitrage Pricing


     
 

Videos about Arbitrage Pricing


     
 

Presentations about Arbitrage Pricing


     
 

Books about Arbitrage Pricing


     
 

More about Arbitrage Pricing


     



Accelerate your management career



Compare with: CAPM

Special Interest Group Leader















 

Return to Management Hub: Finance & Investing


More on Management  |  Return to Management Dictionary  | 

 

This ends our Arbitrage Pricing Theory summary and forum.



About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
2018 12manage - The Executive Fast Track. V14.1 - Last updated: 16-10-2018. All names of their owners.