Investor Glossary-arbitrage pricing theoryInvestor Glossary-arbitrage pricing theoryInvestor Glossary-arbitrage pricing theoryInvestor Glossary-arbitrage pricing theoryInsightful stock market charts - Click here
investor
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

Arbitrage Pricing Theory

The HTML to link to this page
 

Arbitrage pricing theory (APT) posits that investors can predict the return on an asset by tracking its performance in relationship with independent macro-economic variables and common risk factors. Variables and risk factors referenced in arbitrage pricing theory models might include GDP, inflation, interest rates, yield spreads, etc. Arbitrage pricing theory presumes the asset being tracked is sensitive to these variables and risk factors and that the relationship is linear. As in any form of arbitrage, users of arbitrage pricing theory are trying to take advantage of imbalances in a market or between two or more markets. Stock investors use arbitrage pricing theory to identify stocks that are mispriced, then short stocks that are too high and buy stocks that are too low. Arbitrage pricing theory is an alternative to the capital asset pricing model (CAPM). CAPM is much simpler than arbitrage pricing theory because it relies on only two factors -- a stock's beta and the stock market's risk premium. CAPM investors commonly hold high beta stocks in a rising market and low beta stocks in a falling market. Stephen Ross first modeled arbitrage pricing theory in 1976.



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


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