The study employs the Principal Component Analytical (PCA) technique to derive proxies for the factor likelihood APT of Rose using monthly security returns of 53 companies listed in NSE over the period 1 Jan 2003 to 31 Dec 2011. The results of the PCA methodology reveal that 17 latent factors are identified in the Nigerian equity market; while the estimated results of the cross-sectional APT pricing model show that only 4 of the factors are priced. However, the evidence of systematic hypothesis is not ascertained in this study. Thus, the unsystematic risk associate with arbitrage portfolios in the market cannot be reduced/ eliminated no matter the level of diversification
Keywords: APT, Arbitrage Portfolios, Diversification, Idiosyncratic risk, Latent factors, PCA
