Which of the following is the best definition of arbitrage pricing theory (APT) ?

A) A theory showing that the expected return on any risky asset is a linear combination of various factors.
B) A risk that affects at most a small number of assets. Also called unique or asset-specific risks.
C) A risk that influences a large number of assets. Also called market risk.
D) Positively sloped straight line displaying the relationship between expected return and beta.
E) Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.

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Kaitlin Burwell · Accepted Answer

Final Answer : A, Explanation :  Arbitrage Pricing Theory (APT) posits that the expected return on a financial asset can be modeled as a linear function of various macroeconomic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient.

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