Arbitrage pricing theory (APT) is an alternative to the capital asset pricing model (CAPM) for explaining returns of assets or portfolios. Arbitrage-free valuation is the value of an asset or financial instrument based solely on the real performance or cash flows that it generates.The basic intuition that underlies valuation is the absence of arbitrage. No arbitrage means "create profit without any risk". The "No arbitrage Argument" is the theory that since the world is cruel, dark and efficient place, you can never get something for nothing. We often describe arbitrage as a strategy with no initial investment, no risk of a loss, and positive expected profit. Loose Definition of Arbitrage: A trading strategy that earns something from nothing, no matter how the market evolves in the future. Thus, V ϑ,k,n represents the ratio of the wealth of the trading strategy ϑ to the total capitalization of the (k, n)dissected market. For noarbitrage, note that for k∈{0,1}, we have in your model: dSk(t)=rkdt, with r0=0 and r1=1. Check out the secrets of running a profitable Amazon arbitrage business.