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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). [2]
Ross is best known for the development of the arbitrage pricing theory (mid-1970s) as well as for his role in developing the binomial options pricing model (1979; also known as the Cox–Ross–Rubinstein model). He was an initiator of the fundamental financial concept of risk-neutral pricing.
The earliest theory of factor investing originated with a research paper by Stephen A. Ross in 1976 on arbitrage pricing theory, which argued that security returns are best explained by multiple factors. [9] Prior to this, the Capital Asset Pricing Model (CAPM), theorized by academics in the 1960s
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:
There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, [3] the latter corresponding to risk neutral pricing. Investment theory, which is near synonymous, encompasses the body of knowledge used to support the decision-making process ...
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O’Connell’s stated confidence may be rewarded. Maybe the Sam Darnold that was among the NFL’s best stories this season returns to that form.
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