Investor Glossary-aptInvestor Glossary-aptInvestor Glossary-aptInvestor Glossary-aptInsightful stock market charts - Click here
Categories    # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z


The HTML to link to this page

The term APT generally refers to the arbitrage pricing theory. Much like the capital asset pricing model, the APT is able to discount the future cash flows of an asset, and in turn price the asset. The APT accomplishes this by looking at how the asset reacts to changes in certain exogenous factors. Whereas the CAPM looks primarily at the factor sensitivity of the asset's beta, the APT incorporates any number of factors that influence the price of the asset. In practice many of the factor sensitivities used in the APT come from a strictly macroeconomic background, which are often calculated by performing a multivariate regression. The expected return from each factor is then combined with each asset's factor sensitivity in order to determine the expected return under the APT. The notion of arbitrage is brought into the APT when an asset is priced such that its expected return is different than what is predicted by the APT. If the actual expected return of the asset is higher than the model predicts then the APT suggests that someone will sell the market portfolio and buy the incorrectly priced asset in order to create risk free profits. In this manner, APT suggests that arbitrage will eventually cause all prices to converge to the price that is suggested by the APT model.

Rate this APT definition...

Learn about investing with the Investor Glossary Term of the Day

Click here for insightful stock market charts. Where is the market headed? The answer may surprise you. Find out
with the exclusive & Barron's recommended charts of Chart of the Day.

Popular Terms: reverse mortgage, required rate of return, per diem, debt service coverage, phantom income, open position, labor relations, covered put, APR, deferred revenue, annual return, balance sheet, ex-dividend, FICO score, implied volatility, irrevocable trust, 144a, dividends payable, LIBOR, real GDP, current ratio, VIX, quality assurance, Zero Cost Collar, option premium, class C shares, wholly-owned subsidiary, EBITDA, command economy, deferred tax, 1031 exchange, FTSE, stock split, 1035 exchange, ex-dividend date, inflation, retained earnings, minority interest, stock market close, Key Rate Duration, average price per share, cancelled check, risk management, diluted share, margin rate, limit order, 401a, liquidity ratio, in escrow

Accounting | Banking | Bonds | Brokers | Economy | Futures | Mutual Funds | Options | Real Estate | Retirement | Stocks | Taxes | Technical Analysis
Home | Term of the Day | Suggest a Term | Chart of the Day | Dogs of the Dow
©2004-2016 Investor Glossary - All rights reserved - Terms of Use