Arbitrage Pricing Theory and its relevance in modelling market

Abstract

This research compares the Arbitrage Pricing Theory (APT) to the Capital Asset Pricing Theory (CAPT) by looking at numerous macroeconomic factors that affect market security prices and determining how APT explains the majority of the returns. The goal of this study was to look at the fundamental aspects (revenue, assets, liabilities, and growth potentials) in order to compute the intrinsic value based on the investor's risk tolerance. The BSE and NSE websites were used to get month-by-month secondary data over a period of ten years (2010-2020), which included the share price returns of TATA Motors and Eicher Motors as well as the BSE Auto Index. The statistics on GDP growth rate, inflation, and interest rates was obtained from the RBI's official website. The findings imply that the APT model accurately describes the majority of the company's share returns. Furthermore, it is clear that macroeconomic variables have a substantial impact on the risk of an asset over time and are one of the key inputs that financial analysts must consider when calculating expected returns. Furthermore, the sources of risk incorporated in a data set in an APT model inform the investor as to why certain stocks move in a particular direction.