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.
(See Chapter 19 The required rate of return of the Vernimmen)
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