cRYPTO Glossary

Arbitrage Pricing Theory (APT) offers a framework for evaluating market efficiency and identifying arbitrage opportunities in financial markets.

Explanation of Specific Terms:

• Market efficiency: The degree to which prices in financial markets reflect all available information and adjust quickly to new information.
• Arbitrage opportunities: Situations where an asset is mispriced relative to its theoretical value, allowing traders to profit by buying or selling it to exploit the price discrepancy.
• Financial markets: Platforms where securities, commodities, currencies, and other financial instruments are traded.

Key Points for Beginners:

• Why it's important: APT helps investors and analysts understand the relationship between asset prices and their underlying factors, such as economic variables or market risk.
• How it works: APT suggests that the expected return of an asset can be modeled as a linear function of various factors that influence its price, such as interest rates, inflation, or industry-specific variables. By identifying these factors and their impact on asset prices, investors can assess whether an asset is fairly priced or presents an arbitrage opportunity.