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.
APT is like CAPM's more sophisticated cousin who realizes that the investment world is complicated - instead of just caring about how stocks move with the market, it recognizes that factors like inflation, oil prices, and economic growth all matter! The beauty is that APT doesn't specify which factors matter, letting the data reveal what actually drives returns in different markets and time periods.
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