The Arbitrage Pricing Theory is a theory developed by Stephen Ross (1976) and was later extended by Huberman (1981). According to Ross (1976) Arbitrage Pricing Theory (APT) was developed with the views that in the competitive financial markets arbitrage will ensure equilibrium pricing according to risk and return. McLaney (2006) refers to …show more content…
It is a theoretical description of the way in which market price for risk and appropriate measure of risk for a single asset is determined. CAPM is denounced because of the difficulties in selecting a proxy for the market portfolio, as a benchmark an alternative pricing theory with fewer assumptions was developed: Arbitrage Pricing Theory (APT) rationale is to explore the equilibrium relationship between assets’ risk and expected return just as the CAPM does (Korajczyk & Connor, …show more content…
It is a one aspect model which points that return of an asset or a portfolio of assets can be assessed or calculated by one factor, i.e. the beta (β) of that asset which is a measure of non-diversifiable risk of the asset CAPM concerns two types of risk namely unsystematic and systematic risks. APT is a multifactor model signifying that expected return of an asset cannot be measured precisely by taking into account only one factor, i.e. the asset beta. However, Olivia (2011) differ by saying one drawback of Arbitrage Pricing Theory is that there is no attempt to find out these factors, and in fact one has to himself find out empirically different factors in case of every company that he is interested in investigating. The more the number of factors identified, the more complicated the task becomes as one has to find different measures of relationships of price with different factors also. These are the reasons why CAPM is being preferred over it by investors as well as financial