Arbitrage Pricing Theory (APT) is a financial model that explains the relationship between an asset's expected return and its risk factors, using multiple variables instead of relying on a single market risk factor. It provides a framework for understanding how various macroeconomic and firm-specific factors can impact the pricing of assets, allowing investors to identify arbitrage opportunities based on mispricing in the market. APT is particularly useful in contrasting the simpler Capital Asset Pricing Model (CAPM), which focuses only on market risk.
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