Arbitrage pricing theory (APT) is a financial model for asset pricing that relates various macroeconomic risk variables to the pricing of financial assets[1][2][3]. The APT model was proposed by economist Stephen Ross in 1976 as an alternative to the capital asset pricing model (CAPM)[2]. Unlike the CAPM, which assumes markets are perfectly efficient, the APT assumes that markets sometimes misprice securities before eventually correcting and moving back to fair value[2][6]. The APT model factors in many sources of risk and uncertainty, and it looks at several macroeconomic factors that determine the risk and return of the specific asset[6]. The goal of arbitrage is to take advantage of market inefficiencies, such as temporary price differences, to make a profit[1][5]. The APT model helps traders determine the theoretical fair market value of an asset, and traders then look for slight deviations from the fair market price to trade accordingly[6]. The APT model is a useful tool for analyzing portfolios from a value investing perspective, in order to identify securities that may be temporarily mispriced[2]. The APT model holds the expected return of a financial asset as a linear relationship with various macroeconomic indices to estimate the asset price[3].
Citations:
[1] wikipedia
[2] investopedia
[3] wallstreetmojo
[4] newyorkfed
[5] albany
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