State whether each of the consultants arguments is correct or incorrect. Indicate for each

QUESTION

Jeffrey Bruner, CFA, uses the capital asset pricing model (CAPM) to help identify mispriced securities. A consultant suggests Bruner use arbitrage pricing theory (APT) instead. In comparing CAPM and APT, the consultant made the following arguments:
a. Both the CAPM and APT require a mean-variance efficient market portfolio.
b. Neither the CAPM nor APT assumes normally distributed security returns.
c. The CAPM assumes that one specific factor explains security returns but APT does not.
State whether each of the consultants arguments is correct or incorrect. Indicate, for each incorrect argument, why the argument is incorrect.
a. is not correct. APT does not require mean variance efficient market portfolio b. is also not correct.

APM assumes normally distributed security returns. c. This is correct.

ANSWER:

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