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      <h1>Arbitrage Pricing Theory</h1>
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      <h2>Description of Arbitrage Pricing Theory. Explanation.</h2>
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      <h3>&nbsp;</h3>
      <h3>Definition Arbitrage Pricing Theory. Description.</h3>
      <br>
      <p>Arbitrage Pricing Theory (APT) is an alternative model to 
      the <a href="methods_capm.html">Capital Asset Pricing Model</a> (CAPM). It 
      was developed by economist Stephen Ross in 1976 and is based purely on arbitrage 
      arguments. It is an equilibrium model of stock returns in which returns are 
      specified to be a linear function of possibly <u>many</u> factors, in contrast 
      to the CAPM, in which returns are specified to be a linear function of one 
      factor, the systematic (non-diversifiable) risk.</p>
      <br>
      <p>Arbitrage is the practice of taking advantage of a state of 
      imbalance between two (or possibly more) markets and thereby making a risk 
      free profit.</p>
      <br>
      <p>APT holds that the expected return of a financial asset can 
      be modeled as a linear function of various macro-economic factors, where sensitivity 
      to changes in each factor is represented by a factor specific beta coefficient. 
      The model derived rate of return will then be used to price the asset correctly 
      - the asset price should equal the expected end of period price discounted 
      at the rate implied by model. If the price diverges, arbitrage should bring 
      it back into line. </p>
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                          <td class="f2mc"><a target="_blank" title="Show Reactions + React" href="forum.asp?TB=arbitrage_pricing_theory&S=2">Arbitrage Pricing Theory Example</a><br>&quot;Please explain APT in detail supported by practical illustration.&quot;</td>
                          
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                          <td class="f2mc"><a target="_blank" title="Show Reactions + React" href="forum.asp?TB=arbitrage_pricing_theory&S=1">Arbitrage Pricing Theory</a><br>&quot;Can someone develop this section by giving the APT formula and an example for better understanding? Thank you.&quot;</td>
                          
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