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In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross in 1976, [ 1 ] it is widely believed to be an improved alternative to its predecessor, the capital asset pricing model (CAPM ...
The arbitrage pricing theory (APT), a general theory of asset pricing, has become influential in the pricing of shares. APT holds that the expected return of a financial asset can be modelled as a linear function of various macro-economic factors, where sensitivity to changes in each factor is represented by a factor specific beta coefficient:
Investment theory, which is near synonymous, encompasses the body of knowledge used to support the decision-making process of choosing investments, [4] [5] and the asset pricing models are then applied in determining the asset-specific required rate of return on the investment in question, and for hedging.
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In a discrete (i.e. finite state) market, the following hold: [2] The First Fundamental Theorem of Asset Pricing: A discrete market on a discrete probability space (,,) is arbitrage-free if, and only if, there exists at least one risk neutral probability measure that is equivalent to the original probability measure, P.
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In Houston, they’re already talking about Alex Bregman in the past tense. But what’s next for the two-time All-Star and World Series champion? The Astros’ American League dynasty was ...
- The APT describes the mechanism of arbitrage whereby investors will bring an asset which is mispriced, according to the APT model, back into line with its expected price. Note that under true arbitrage, the investor locks-in a guaranteed payoff, whereas under APT arbitrage as described below, the investor locks-in a positive expected payoff.