What is arbitrage pricing theory?

The Arbitrage Pricing Theory (APT) is an influential theory that focuses on the pricing of financial assets. In contrast to the Capital Asset Pricing Model (CAPM), APT assumes the idea that the price of an asset must be based on multiple risk factors and not just on market risks. The core of APT is that two identical assets cannot be priced differently; if this does happen, arbitrage will quickly eliminate the difference. This model offers an alternative framework for understanding pricing in financial markets.