Economist Stephen Ross is to be credited for developing the arbitrage pricing theory in 1976, wherein he came up with an asset pricing model, stating that the returns from an asset can be forecasted based on a linear relation between the asset’s expected return and the macroeconomic factors that affect the asset’s risk. Asset pricing model is now applied to all fields, like stocks, shares, cryptocurrencies etc. and thus is a useful tool in the hands of investors. Investors use this to estimate the price of an asset, based on the expected returns as per this model.

arbitrage pricing theory

How it Works
This theory of arbitrage pricing, that quickly replaced the CAPM model, works as per the formula:
E(R)i=E(R)z+(E(I)−E(R)z)×βn
Where:
E(R)i=Expected return on the asset
Rz=Risk-free rate of return
βn=Sensitivity of the asset price to macroeconomic factor n
Ei=Risk premium associated with factor i

The number of influences, that can affect a type of instrument, can be many, and even more for cryptocurrency. So the investor has to decide which factors he feels are relevant while which can be ignored while working out the price as per this model. Also, arbitrage pricing theory not only helps in deciding whether the price has been undervalued or overvalued for some investment, but also the overall portfolio can be tested for its risk exposure to a number of parameters. There are some companies in the market that help investors make such decisions, like executium.com, and are usually based on arbitrage pricing theory model.

Who Should Use Arbitrage Pricing Theory
Arbitrage pricing theory model can be used both by portfolios and by individual instruments. So that means, you do not have to be a bulk or huge investor to benefit from this theory, even a small investor, who just invests in one medium, say cryptocurrency, can apply the knowledge of arbitrage pricing theory and make profits from his investments. Financial consultants, both online and offline, make use of this pricing theory to make wise decisions. Say for example executium.com is a company that always checks the portfolios of its customers with this technique, besides other ones, and comes out with sound investing proposals from time to time. So professional firms are deploying the arbitrage pricing theory too.

pricing theory

Why Professional Services
The arbitrage pricing theory, although a very adept tool in the hands of the traders, but is difficult to apply. The reason being there are a number of variables affecting risk on return, and it is difficult to well research these entire single handedly. It becomes all the more difficult if cryptocurrencies are the medium that you are planning to apply this theory to. That is why it is advisable to opt for the services of some financial consultants, like executium.com, who serve their customers in this regard. Exceutium.com provides flagship services when it comes to cryptocurrencies. It can help you with just one aspect of cryptocurrency trading, like the arbitrage pricing theory, or with multiple aspects, like options trading, arbitrage betting, cryptocurrency trading algorithms and signals etc. With full power and control in your own hands, executium.com is a one of the kind name in the marketplace of online financial consultants.