capital asset pricing model is considered a "demand side" model. Its results, although similar to those of the APT, arise from a maximization problem of each investor's utility function, and from the resulting market equilibrium (investors are considered to be the "consumers" of the assets). Implementation As with the CAPM, the factor-specific betas are found via a linear regression of historical security returns on the factor in question. Unlike the CAPM, the APT, however, does not itself reveal the identity of its priced factors - the number and nature of these factors is likely to change over time and between economies. As a result, this issue is essentially empirical in nature. Several a priori guidelines as to the characteristics required of potential factors are, however, suggested: their impact on asset prices manifests in their unexpected movements and they are completely unpredictable to the market at the beginning of each period they should represent undiversifiable influences (these are, clearly, more likely to be macroeconomic rather than firm-specific in nature) on expected returns and so must be quantifiable with non-zero prices timely and accurate information on these variables is required the relationship should be theoretically justifiable on economic grounds Chen, Roll and Ross identified the following macro-economic factors as significant in explaining security returns: surprises in inflation; surprises in GNP as indicated by an industrial production index; surprises in investor confidence due to changes in default premium in corporate bonds; surprise shifts in the yield curve. As a practical matter, indices or spot or futures market prices may be used in place of macro-economic factors, which are reported at low frequency (e.g. monthly) and often with significant estimation errors. Market indices are sometimes derived by means of factor analysis. More direct "indices" that might be used are: short-term interest rates; the difference in long-term and short-term interest rates; a diversified stock index such as the S&P 500 or NYSE Composite; oil prices gold or other precious metal prices Currency exchange rates See also Beta coefficient Capital asset pricing model Carhart four-factor model Cost of capital Earnings response coefficient Efficient-market hypothesis Fama–French three-factor model Fundamental theorem of arbitrage-free pricing Investment theory Modern portfolio theory Post-modern portfolio theory Rational pricing Risk factor (finance) Roll's critique Value investing References Further reading External links The Arbitrage Pricing Theory Prof. William N. Goetzmann, Yale School of Management The Arbitrage Pricing Theory Approach to Strategic Portfolio Planning (PDF),