EC4024 Lecture 11: APT

Introduction

CAPM is the baseline model one uses when trying to price a risky asset. The other major option used when pricing stocks is the Arbitrage Pricing theory, APT, developed by Stephen Ross of MIT. We’ll use this lecture to go through APT, show how it differs from CAPM, derive the single factor model, and show some examples of the multi factor model.

Length: 50 mins

Click below to get lecture notes, handouts, slides, programs, and links to further reading.

Slides

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Handout
EC4024_Lecture11_Handout.pdf
Program
EC4024_aptclass.xls
Further Reading
Loads of APT-related papers
Ross, S. (1976), The Arbitrage Theory of Option Pricing, Journal of Economic Theory, Vol 13 no. 3, pp. 341-360.

Stephen A. Ross, The Current Status of the Capital Asset Pricing Model (CAPM) The Journal of Finance, Vol. 33, No. 3, Papers and Proceedings of the Thirty-Sixth Annual Meeting American Finance Association, New York City, December 28-30, 1977 (Jun., 1978), pp. 885-90