Which of the following is the best deﬁnition of arbitrage pricing theory (APT)?
A) A theory showing that the expected return on any risky asset is a linear combination of various factors.
B) A risk that affects at most a small number of assets. Also called unique or asset-speciﬁc risks.
C) A risk that inﬂuences a large number of assets. Also called market risk.
D) Positively sloped straight line displaying the relationship between expected return and beta.
E) Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.

Question

Quizplus · Accepted Answer

Arbitrage pricing theory (APT) is a theory that suggests that the expected return on any risky asset can be explained by a linear combination of various factors. These factors can include economic variables such as inflation, interest rates, and consumer spending. APT is a model that allows investors to calculate the fair value of any given asset based on these underlying factors, and it assumes that in an efficient market, any pricing discrepancies will be eliminated through arbitrage.

Which of the Following Is the Best Deﬁnition of Arbitrage