A multi-factor asset pricing model that explains security returns through exposure to various systematic risk factors, rather than just market risk like CAPM. APT suggests that multiple economic factors (inflation, interest rates, GDP growth) drive asset returns.
Developed by Stephen Ross in 1976, combining 'arbitrage' from French 'arbitrer' meaning 'to judge' and 'pricing theory.' The model emerged as a more flexible alternative to CAPM, allowing for multiple sources of systematic risk rather than a single market factor.
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