APT

(noun)

In finance, arbitrage pricing theory (APT) is a general theory of asset pricing that holds, which holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient.

Related Terms

Examples of APT in the following topics:

  • Arbitrage Pricing Theory

    • The Arbitrage Pricing Theory (APT) is a linear relationship between systemic factors and the return of an asset.
    • Arbitrage Pricing Theory (APT) is a model for asset pricing that was proposed by Stephen Ross in 1976.
    • The expected return of asset j under APT can be expressed in the following form:
    • Unlike CAPM, however, APT allows for there to be multiple factors that explain the return .
    • Naturally, this means that there are limits to how accurate APT is in the real world, but APT is still used as the basis for many of the commercial risk systems employed by asset managers.

  • Defining Capital Budgeting

    • Managers may use models, such as the CAPM or the APT, to estimate a discount rate appropriate for each particular project, and use the weighted average cost of capital(WACC) to reflect the financing mix selected.