Arbitrage Pricing Theory (APT) is a financial model that explains the relationship between the expected return of an asset and its risk factors. Unlike the Capital Asset Pricing Model (CAPM), which relies on a single market risk factor, APT considers multiple factors that can affect asset prices, such as inflation, interest rates, and economic growth. APT assumes that if an asset is mispriced, investors can exploit this discrepancy through arbitrage, which involves buying undervalued assets and selling overvalued ones. This process helps bring prices back to their fair value, ensuring that expected returns align with the associated risks.