Generally, when it comes to investments, people should at least know the basics to be able to make budget-changing decisions. This means that finance knowledge is a must – there are essential concepts which you can’t overlook if you want to handle your money well.
To begin with, there’s the concept of “security”. In short, a security is a tradable financial asset whose value is derived from a contractual claim, such as stocks. Through contractual claims, the buyer of a security receives a legally agreed upon amount periodically. Then there’s the concept of a “return”, which is the money gained or lost on an investment. With these in mind, we can now remember that the arbitrage pricing theory is basically a theory of asset pricing developed from the relationship between a security’s expected return and its risks.
This theory aims at the fact that assets on the market can sometimes be incorrectly priced for a brief period of time. The prices are always corrected eventually, but arbitrageurs can easily take advantage of mispriced securities and gain profit. In essence, this theory provides traders with a model for finding the theoretical fair market value of a financial asset. If they know it, then they can see the price fluctuations and trade accordingly. For instance, if the fair market price would be $20 for an asset, but the price drops to $15, a trader would buy the stock believing that the price would rise again to $20.
Unlike other arbitrage theories, this one has a high profitability chance, and the reason is simple: APT is more complex and more difficult to calculate, as it includes all risk-factors that an arbitrageur should know in order to gain profit from his trades. So, after learning, all you need is patience.