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Arbitrage pricing theory (APT)
Also called APT. A CFA and FRM term, defined in plain English with the distinction examiners test.
What it means
A model deriving expected returns from exposures to multiple systematic factors, assuming no arbitrage rather than a single market portfolio.
The exam angle
More general than CAPM but silent about what the factors are. That silence is both its strength and its practical weakness.
Where it appears in the syllabus
- Portfolio ConstructionCFA Level II · exam weight 10–15% · Active management, ETFs, multifactor models, market risk, backtesting.
- Risk & Investment ManagementFRM Part II · exam weight 15% · Factor theory, risk budgeting, attribution, hedge funds, illiquid assets.
Related terms
- Factor investingBuilding portfolios around systematic return drivers — value, size, momentum, quality, low volatility — rather than…
- Multifactor modelA model explaining returns by exposure to several systematic factors rather than to the market alone.
- Style driftA manager gradually moving away from the strategy the mandate describes.
- Active shareThe proportion of a portfolio’s holdings that differs from its benchmark, from 0% for an index fund to 100% for no…
- Fundamental law of active managementExpected active return is a function of skill, the number of independent decisions taken, and how fully those…
- Hedge fund replicationReproducing hedge fund returns using liquid instruments and factor exposures, rather than by paying for the funds…
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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