The Arbitrage Pricing Theory (APT)

The Arbitrage Pricing Theory (APT) is a method used to estimate the expected return of an investment, considering multiple economic factors that can influence its price—such as interest rates, inflation, or economic growth. Unlike simpler models that focus on a single factor, APT recognizes that many variables impact asset returns. It suggests that if an asset's return deviates from its expected value based on these factors, traders can capitalize on these differences through arbitrage—buying undervalued or selling overvalued assets—leading to equilibrium where no further riskless profits exist.