Arbitrage Pricing Theory (APT) is a model proposed by Stephen Ross in 1976 for calculating returns on securities. It assumes multiple factors affecting security returns, differing from the Capital Asset Pricing Model (CAPM), which relies on a single systematic risk factor.
The Capital Asset Pricing Model (CAPM) is a sophisticated model that establishes a relationship between expected risk and expected return. It operates on the principle that investors require higher returns as compensation for higher risks.
The risk-free rate or risk-free return represents the interest rate on the safest investments, such as federal government obligations. It is a fundamental component in financial models, particularly in assessing the required return on investments.
