This is one of two influential economic theories of how assets are priced in the financial markets.

 

The other is the capital asset pricing model. The arbitrage pricing theory says that the price of a financial asset reflects a few key risk factors, such as the expected rate of interest, and how the price of the asset changes relative to the price of a portfolio of assets.

 

If the price of an asset happens to diverge from what the theory says it should be, arbitrage by investors should bring it back into line.

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