Arbitrage does not insure that the risk-adjusted expected returns to two risky assets will be equal. Arbitrage is based on risk-free portfolios and promotes efficient pricing of assets. When an arbitrage opportunity is presented by a mispricing of assets, the increased supply of the ‘overpriced’ asset and the increased demand for the ‘underpriced’ asset by arbitrageurs, will move the prices toward equality and act to correct the mispricing. |
