Arbitrage Pricing 1079 and is the common return on all"zero-beta"assets, i. e, assets with b =0, for all j, whether or not a riskless asset exists If there is a single factor, then the apt pricing relationship is a line in expected return, Ei, systematic risk, b,, space: Figure 1 can be used to illustrate our argument geometrically. Suppose, for example, that assets 1, 2, and 3 are presently held in positive amounts in some portfolio and that asset 2 is above the line connecting assets 1 and 3. Then a portfolio of I and 3 could be constructed with the same systematic risk as asset 2, but with a lower expected return. By selling assets l and 3 in the proportions they represent of the initial portfolio and buying more of asset 2 with the proceeds, a new position would be created with the same overall risk and a greater return. Such arbitrage opportunities will be unavailable only when assets lie along a line. Notice that the intercept on the expected return axis would be ec when no arbitrage opportunities are present The pricing relationship(2)is the central conclusion of the APT and it will be he cornerstone of our empirical testing, but it is natural to ask what interpretation can be given to the A, factor risk premia. By forming portfolios with unit systematic risk on each factor and no risk on other factors, each A, can be interpreted as λ=E1-E the excess return or market risk premium on portfolios with only systematic factori risk. Then(2)can be rewritten as E1-E0=(E1-E0)b (ER-Eo)b, he"market portfolio"one such systematic risk factor? As a well diversified folio, indeed a convex combination of diversified portfolios, the market E;-Eo=λb