Arbitrage Pricing Theory Definition

A mathematical theory that attempts to determine the expected or required rates of return on risky assets based on the asset’s systemic relationship to more than one risk factor. The theory was developed by Stephen Ross in the early 1970s and was initially published in 1976. It assumes that capital markets are perfectly competitive and investors always prefer more wealth to less wealth, even if less wealth comes with more certainty. In contrast, another popular theory, the Capital Asset Pricing Model, focuses on a single risk factor.