Definition
Arbitrage pricing theory (APT) is designed as a replacement for the untestable capital asset pricing model. In essence, the APT says that asset returns are a linear function of various macro-economic factors (e.g., industrial production, the spread between long- and short-term interest rates, expected and unexpected inflation, the spread between high- and low-grade bonds).
At the present time the model’s empirical validity, testability, and the number and identity of its return-generating factors are controversial issues in financial economics.[1]
References
- American Marketing Association, AMA Dictionary.