What is the Arbitrage Pricing Theory?
One of the first things to understand about the arbitrage pricing theory is that the concept has to do with the process of asset pricing. Essentially, the arbitrage pricing theory, or APT for short, helps to establish the price model for various shares of stock. Here is some information about the arbitrage pricing theory, and why this concept is so helpful in determining the pricing model for the buying and selling of stock. Developed by economist Stephen Ross in 1976, the underlying principle of the pricing theory involves the recognition that the anticipated return on any asset may be charted as a linear calculation of relevant macro-economic factors in conjunction with market indices. It is expected that there will be some rate of change in most if not all of the relevant factors. Running scenarios using this model helps to arrive at a price that is equitable to the anticipated performance of the asset. The desired result is that the asset price will equal to the anticipated price f
This theory has been developed by economist Stephen Ross in 1967. Arbitrate pricing theory is general theory of asset pricing which has become significant in the pricing of shares. The arbitrage pricing theory here onwards referred to as the APT holds that the expected return of any financial asset can be modelled as a linear function of various macro economic factors or theoretical market indices. Here sensitivity to changes in every single factor is represented as a factor specific beta coefficient. The rate of return derived from the model will then be used to price the asset correctly. The arbitrage is used to bring the price back into line if it diverges. Stephen Ross is a professor in finance and economics from the MIT Sloan School of Management. He is a Franco Modigliani professor in Finance and economics. He has written many books on economics and finance which are widely used in all the big universities in the USA.
