Arbitrage Pricing Theory (APT)

Arbitrage Pricing Theory (APT) is a financial model that explains how the prices of assets, like stocks, are determined by various economic factors. Unlike the Capital Asset Pricing Model (CAPM), which focuses only on market risk, APT considers multiple influences such as inflation, interest rates, and economic growth. It assumes that if an asset is mispriced relative to these factors, investors can make a profit by buying or selling it until its price corrects. In essence, APT provides a framework for understanding the relationship between risk and return in the investment landscape.