Literature Review on Arbitrage Price Theory Finance Essay
Arbitrage Pricing Theory APT is a multi-factor asset pricing model based on the idea that the return of an asset can be predicted using the linear relationship between. Using this linear relationship, Ross 1971, 1974, 1976 developed the arbitrage pricing theory APT. Based on non-arbitration terms, the APT is a more general one. The primary motivation behind the Arbitrage Pricing Theory APT is to free the model from the restrictive assumptions that lead to the MV paradigm. A second motivation, the arbitrage price theory APT, was mainly developed by Ross 1976a, b. It is a one-period model in which each investor believes that the stochastic, The arbitrage price theory APT was mainly developed by Ross, 1976a. It is a one-period model in which each investor believes that the stochastic properties of asset capital returns are consistent with a factor structure. Ross argues that if equilibrium prices do not provide arbitrage opportunities over static portfolios of the. On the economics side, the Arbitrage Pricing Theory emphasizes the principle of arbitrage itself, which is a fundamental concept in finance. Arbitrage in economics involves the practice of taking advantage of a price difference between two or more markets, by making a combination of matching deals that capitalize on the imbalance, the profit and the Arbitrage Pricing Theory Formula. The formula for APT is as follows. Ex, Rf, β1. β2. βn, factor n where E x is the expected return of an asset. Rf, the expected return assuming zero systematic risk, or market risk. β, the sensitivity of the asset to the risk factor beta