What Is the Arbitrage Pricing Theory (APT)?

Arbitrage pricing theory (APT) is a multi-factor asset pricing model that predicts an asset's returns using the linear relationship between the asset’s expected return and a number of macroeconomic variables that capture systematic risk. APT assumes markets sometimes misprice securities before they are corrected and move back to fair value. Using APT, arbitrageurs hope to take advantage of any deviations from fair market value. f0f3