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Arbitrage Pricing Theory

Arbitrage Pricing Theory

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Published by bimalch

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Published by: bimalch on Aug 27, 2009
Copyright:Attribution Non-commercial

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07/09/2011

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 Arbitrage Pricing Theory
 
 
 Arbitrage Pricing Theory (APT)
Based on the law of one price. Two itemsthat are the same cannot sell at different prices
If they sell at a different price, arbitragewill take place in which arbitrageurs buythe good which is cheap and sell the onewhich is higher priced till all prices for thegoods are equal
 
 
 APT 
In APT, the assumption of investors utilizing amean-variance framework is replaced by anassumption of the process of generating securityreturns.
APT requires that the returns on any stock belinearly related to a set of indices.
In APT, multiple factors have an impact on thereturns of an asset in contrast with CAPM modelthat suggests that return is related to only onefactor, i.e., systematic risk 

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