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. The CAPM assumes that one specific factor explains security returns but APT does not.
State whether each of the consultant’s arguments is correct or incorrect. Indicate, for each incorrect argument, why the argument is incorrect.
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