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A Simple Exposition of The Arbitrage Pricing Theory Approximation

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  • John J. Beggs

    (Australian National University.)

Abstract

This paper presents the Arbitrage Pricing Theory (APT) in a finite economy for the familiar case of quadratic utility functions. The standard APT result of a linear relationship between expected returns and the covariances of returns is shown to be approximately true, and an expression for the error of the approximation is given. Some suggestive calculations indicate that the error in the approximation is likely to be small.

Suggested Citation

  • John J. Beggs, 1986. "A Simple Exposition of The Arbitrage Pricing Theory Approximation," Australian Journal of Management, Australian School of Business, vol. 11(1), pages 13-22, June.
    • Handle: RePEc:sae:ausman:v:11:y:1986:i:1:p:13-22
    DOI: 10.1177/031289628601100102
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    References listed on IDEAS

    as
    1. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    2. Connor, Gregory, 1984. "A unified beta pricing theory," Journal of Economic Theory, Elsevier, vol. 34(1), pages 13-31, October.
    3. Grinblatt, Mark & Titman, Sheridan, 1983. "Factor pricing in a finite economy," Journal of Financial Economics, Elsevier, vol. 12(4), pages 497-507, December.
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