A theory of asset pricing that assumes arbitrage ensures equilibrium and that asset prices are explained by a set of underlying factors. The fundamental assumption of APT is that investors will arbitrage away any excessive return so that the market will be in equilibrium. This ensures that the expected returns of all assets are linearly related to the fundamental factors that correlate the returns on different assets. The coefficients in the linear relationship are called the factor loadings, or the asset’s sensitivities to the factors; they reflect the extent to which the asset is exposed to the risk of each factor. These risk factors generalize the beta coefficient of the Capital Asset Pricing Model.