In financial economics, asset pricing refers to the formal development of the principles used in pricing, together with the resultant models. The treatment inheres the interrelated paradigms of general equilibrium asset pricing and rational asset pricing, the latter corresponding to risk neutral pricing.

Investment theory, which is near synonymous, encompasses the body of knowledge used to support the decision-making process of choosing investments, and the asset pricing models are then applied in determining the asset-specific required rate of return on the investment in question, and for hedging.

Under general equilibrium theory prices are determined through market pricing by supply and demand. Here asset prices jointly satisfy the requirement that the quantities of each asset supplied and the quantities demanded must be equal at that price - so called market clearing. These models are born out of modern portfolio theory, with the capital asset pricing model (CAPM) as the prototypical result. Prices here are determined with reference to macroeconomic variables–for the CAPM, the "overall market"; for the CCAPM, overall wealth– such that individual preferences are subsumed.

These models aim at modeling the statistically derived probability distribution of the market prices of "all" securities at a given future investment horizon; they are thus of "large dimension". See § Risk and portfolio management: the P world under Mathematical finance. General equilibrium pricing is then used when evaluating diverse portfolios, creating one asset price for many assets.

Calculating an investment or share value here, entails: (i) a financial forecast for the business or project in question; (ii) where the output cashflows are then discounted at the rate returned by the model selected; this rate in turn reflecting the "riskiness" - i.e. the idiosyncratic, or undiversifiable risk - of these cashflows; (iii) these present values are then aggregated, returning the value in question. See: Financial modeling § Accounting, and Valuation using discounted cash flows. (Note that an alternate, although less common approach, is to apply a "fundamental valuation" method, such as the T-model, which instead relies on accounting information, attempting to model return based on the company's expected financial performance.)

Under Rational pricing, derivative prices are calculated such that they are arbitrage-free with respect to more fundamental (equilibrium determined) securities prices; for an overview of the logic see Rational pricing § Pricing derivatives.

In general this approach does not group assets but rather creates a unique risk price for each asset; these models are then of "low dimension". For further discussion, see § Derivatives pricing: the Q world under Mathematical finance.

Calculating option prices, and their "Greeks", i.e. sensitivities, combines: (i) a model of the underlying price behavior, or "process" - i.e. the asset pricing model selected, with its parameters having been calibrated to observed prices; and (ii) a mathematical method which returns the premium (or sensitivity) as the expected value of option payoffs over the range of prices of the underlying. See Valuation of options § Pricing models.