Arbitrage Pricing Theory (APT) is a financial model used to determine the expected
return of an asset based on its exposure to various risk factors. It is an alternative to the Capital
Asset Pricing Model (CAPM) and provides a framework for pricing assets by considering multiple
sources of systematic risk.
The main idea behind APT is that the expected return of an asset
can be explained by its sensitivity to different risk factors rather than just the overall market
risk. APT assumes that the returns of assets are driven by several common factors, such as
interest rates, inflation, GDP growth, industry-specific variables, or other macroeconomic
indicators.