Arbitrage Pricing Theory - APT

finance a la shmoop what is arbitrage? not yourbritage or mybitrage but

arbitrage what it's been a while since we conjugated anything around here oh ok [Man talking about arbitrage]

so moving on arbitrage is a riskless trade you make guaranteed profits just

for being on top of things or in the right place at the right time or you're

there when opportunity comes a-knockin think about the stock exchanges in the [Men working in stock exchange]

pre-internet era around the world communication well it was relatively

slow and expensive back then especially when it came to sharing data one [Man talking into olden microphone]

relatively easy arbitrage or riskless trade opportunity that came about was

when stocks traded at one price on the various european exchanges versus the

prices it traded at on the US exchanges like shares of IBM might have been [Share price graph of IBM]

offered for sale at $165 32 cents on the london stock exchange even net of

currency conversion prices remember the Brits were on the pound system but in

the US investors were paying $165 47 cents a share

so an easy 15 cents a share was made all day long in buying the shares of IBM in

London and then just selling him back here in New York well both sides of the

trade were made at the same time it was riskless it was arbitrage and arbitrage

became a whole industry for a while until the capital markets went to work

and spreads tightened as communication got more liquid and people sprayed a [Spreads word becomes narrower]

bunch of wd-40 on information passing around the world and then that 15 cent [15 cents transfers from US to England]

spread from London to New York became more like a penny or a tenth of a penny

or at least close enough of a spread so that it was no longer worth bothering to

try and make a buck or a billion whatever those arbitrageours made in

those days