Arbitrage Pricing Theory (APT) is a financial model that explains how the price of an asset is determined by various factors or risks. Unlike the Capital Asset Pricing Model (CAPM), which focuses on market risk, APT considers multiple sources of risk that can affect an asset's return. These factors can include economic indicators, interest rates, and inflation. The theory suggests that if an asset is mispriced, investors can exploit this discrepancy through arbitrage, which involves buying and selling assets to profit from price differences. APT helps investors understand the relationship between risk and return, guiding them in making informed investment decisions.