The arbitrage pricing theory (APT) as discussed in Chapter 5 starts from the plausible assumption that there are a number of factors which drive the return on any financial asset. Whereas the CAPM is driven by a single factor, the return on the market portfolio, the APT allows that many factors drive rates of return. The key issues in applying APT to determine utility allowed rates of return are associated with determining what those factors are and how they impact rates of return. As were Chapters 8 and 9, this chapter is devoted to the methodology of calculating rates of return.

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