Definition for : Arbitrage pricing theory, APT

The Arbitrage Pricing Theory model, proposed by Stephen Ross, assumes that the Risk premium is a function of several variables, not just one, i.e. macroeconomic variables (V1, V2,..,Vn), as well as a company "noise". So for Security J: rJ = a + b1 * rV1+ b2 * rV2 + ... + bn * rVn + company specific variable. The model does not stipulate which V factors are to be used. They can be the oil price, changes in the Yield curve, exchange rates, Inflation rate, manufacturing activity indexexes, etc.
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