A financial theory posited as a testable, and more flexible, alternative to the CAPITAL ASSET PRICING MODEL (CAPM), based on the concept that multiple linear RISK factors influence the return of a security, and the factors can be estimated through principal components/factor analysis. By understanding the risk and return contribution of each factor, an optimal portfolio can be created. APT, like CAPM, makes use of BETA as a measure of risk. The singlefactor APT return is given by: where E(rj) is the expected return of security j, E(rf) is the expected RISKFREE RATE, 1 is the slope of risk factor 1, and 1 is the beta related to risk factor 1 and security j. The equation can be expanded to multifactor form, with z risk factors: Additional references: Roll (1977), Roll and Ross (1980), Ross (1976).
What is ARBITRAGE PRICING THEORY (APT)?
Featuring Black’s Law Dictionary
Nothing implied or stated on this page should be construed to be legal, tax, or professional advice. The Law Dictionary is not a law firm and this page should not be interpreted as creating an attorney-client or legal adviser relationship. For questions regarding your specific situation, please consult a qualified attorney.
- Restitution Law – What it is, How to Avoid it, and Tips on Asking for It
- Should I Freeze My Credit?
- Living Will – The Pros & Cons You Need to Know
- What does it mean to be acquitted?
- Forming an LLC in Missouri
- Double Jeopardy Law
- How To Take Someone To Small Claims Court
- What is Jury Nullification?
- Guide to Court Ordered Mediation
- Workplace Retaliation – What It Is And How To Handle It
- What Is A Police Welfare Check?
- Best Way to Find Someone in Jail for Free
- How to Transfer a Car Title When The Owner Is Deceased
- How To Find A Name & Address Using A License Plate Number
- Best Way to Write a Professional Letter to a Judge
- How To Find An Inmate’s Release Date
- What Can You Do At 18 Legally?
- Signing a Letter on Someone Else’s Behalf
- How Do You Look up License Plate Numbers?
- Best Way To Run A Free Arrest Warrant Check