1074 The Journal of finance tions of the CAPM equation have been concocted beginning from the first principles of utility theory; but the models popularity is not due to such analyses, for they make all too obvious the assumptions required for the CAPm's validity and make no use of the common variability of returns. a review of recent finance exts(e. g, Van Horne, [54, pp. 57-63])reveals that rationalizations of the CAPM are based instead on the dichotomy between diversifiable and non-diversifiable risk, a distinction which refers to a linear generating process, not to the CAPm derived from utility theory The aPt is a particularly appropriate alternative because it agrees perfectly with what appears to be the intuition behind the CAPM. Indeed, the APt is based on a linear return generating process as a first principle, and requires no utility assumptions beyond monotonicity and concavity. Nor is it restricted to a single period; it will hold in both the multiperiod and single period cases. Though consistent with every conceivable prescription for portfolio diversification,no particular portfolio plays a role in the aPt. Unlike the CAPM, there is no requirement that the market portfolio be mean variance efficient. There are two major differences between the aPt and the original Sharpe[50] diagonal"model, a single factor generating model which we believe is the intuitive grey eminence behind the CAPM. First, and most simply, the APT allows more than just one generating factor. Second, the aPt demonstrates that since any market equilibrium must be consistent with no arbitrage profits, every equilibrium will be characterized by a linear relationship between each asset,s expected return and its returns response amplitudes, or loadings, on the common factors. With minor caveats, given the factor generating model, the absence of riskless arbitrage profits-an easy enough condition to accept a priori-leads immediately to the Its modest assumptions and its pleasing implications surely render the APT worthy of being the object of empirical testing To our knowledge, though, there has so far been just one published empirical study of the aPt, by gehr [17]. He began with a procedure similar to the one reported here. We can claim to have extended Gehr's analysis with a more r omprehensive set of data(he used 24 industry indices and 41 individual stocks) nd to have carried the analysis farther--to a stage actually required if the tests are to be definitive. Nonetheless, Gehr's paper is well worth reading and it must be given precedence as the first empirical work directly on this subject. Another empirical study related to the aPt is an early paper by Brennan [6], which is unfortunately still unpublished. Brennans approach was to decompose the residuals from a market model regression. He found two factors present in the residuals and concluded that "the true return generating process must be represented by at least a two factor model rather than by the single factor diagonal model"(p. 30). Writing before the aPt, Brennan saw clearly that "it is ot possible to devise cross-sectional tests of the Capital Asset Pricing Model, since only in the case of a single factor model is it possible to relate ex ante and ex post returns"(p. 34). Of course, the APT's empirical usefulness rests precisely in its ability to permit such cross-sectional tests whether there is one factor or The possibility of multiple generating factors was recognized long ago. Farrar