Arbitrage Pricing Theory
arbitrage-pricing-theory">Arbitrage Pricing Theory (APT) is a financial model that explains how the price of assets, like stocks, can be influenced by various economic factors. Unlike the Capital Asset Pricing Model (CAPM), which focuses on a single risk factor (market risk), APT considers multiple factors, such as interest rates, inflation, and economic growth. It suggests that if a stock is mispriced based on these factors, savvy investors can exploit this discrepancy (known as arbitrage) to make a profit. Essentially, APT provides a framework to understand the relationship between risk and expected returns across different securities.
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Arbitrage Pricing Theory (APT) is a financial model that explains how the prices of assets, like stocks, are determined based on various risk factors. Unlike the Capital Asset Pricing Model, which focuses on market risk, APT considers multiple factors that might affect asset prices, such as economic indicators or interest rates. The idea is that if an asset is priced incorrectly due to these factors, savvy investors can exploit these price discrepancies to make risk-free profits, known as arbitrage. Over time, this process helps align prices with their true value based on underlying risks.