No-Arbitrage Pricing Theory

No-Arbitrage Pricing Theory states that in efficient markets, there are no opportunities to make riskless profits without investment. It means that the price of a financial asset should align with its expected future payoffs, considering risk factors and market conditions. If an asset is priced too high or too low, investors would buy or sell until the price adjusts—eliminating riskless profit opportunities. This principle helps determine fair asset prices by linking them to a combination of risk factors, ensuring consistency and preventing unlimited riskless profits, which keeps markets stable and efficient.