“Arbitrage Pricing Theory”
Coauthor(s): Zhenyu Wang.
Editors: Larry Blume and Steven Durlauf
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Focusing on asset returns governed by a factor structure, the APT is a one-period
model, in which preclusion of arbitrage over static portfolios of these assets leads to a
linear relation between the expected return and its covariance with the factors. The
APT, however, does not preclude arbitrage over dynamic portfolios. Consequently,
applying the model to evaluate managed portfolios is contradictory to the no-arbitrage
spirit of the model. An empirical test of the APT entails a procedure to identify
features of the underlying factor structure rather than merely a collection of meanvariance
efficient factor portfolios that satisfies the linear relation.
Source: New Palgrave Dictionary of Economics
Huberman, Gur, and Zhenyu Wang. "Arbitrage Pricing Theory." In New Palgrave Dictionary of Economics. 2nd ed. Ed. Larry Blume and Steven Durlauf. England: Palgrave Macmillan, August 2005.