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How to understand Ross's first basic theorem of asset pricing
The basic theorem of asset pricing is the general principle of arbitrage pricing. This theorem can be expressed as follows: no arbitrage hypothesis is equivalent to the existence of some equivalent probability measure of future uncertainty, which makes the discount price process of each financial asset a martingale under this equivalent probability measure. The basic theorem of asset pricing was put forward by American economist Ross (S.A) in his classic paper on APT.