Arbitration pricing theory is based on a much lesser number of assumptions about the stock market character as compared to CAPM. The "arbitration" concept suggests earning guaranteed no-risk profit from market speculation. As arbitration example can serve a situation when a stock is traded in different markets, while the current market price of this stock in those markets is different. In that case the following sequence of actions is apparent: sell the stock short (sale of borrowed securities) in the market where the stock price is higher and buy the same amount of stock in another market where it costs less. Imagine now that such an opportunity really exists. Since there are many participants in the stock market, it is hardly worth hoping that nobody else would notice such an opportunity - notice they will, and start capitalizing on it. But "unexpected" demand increase in one market with lower stock prices, and offer increase in another market with higher stock prices, will inevitably result in the leveling of prices: higher demand stimulates price increase, while higher offer brings it down. The situation described is an example the simplest arbitration. However, there might be other, more complex types (multi-stage, distributed in time).
Arbitration pricing theory is based on one assumption: arbitration (of any kind) is impossible in balanced market conditions. If such an opportunity exists, market will quickly "liquidate" it.
Further reasoning on impossibility of arbitration portfolio creation leads to basic equation of asset pricing, which can be considered as a practical result of this theory. It is interesting to note the fact that APT equation is a generalization of CAPM equation, although the arbitration theory has been created as its alterna ...