CAPM vs. APT Question

[wanderingcfa]

John Smith, CFA, uses the capital asset pricing model to help identify mispriced
securities. Sally Joe suggests Smith use arbitrage pricing theory (APT) instead. In
comparing CAPM and APT, Sally made the following statements:
1. Both the CAPM and APT require a mean variance efficient market portfolio.
2. Neither the CAPM nor APT assumes normally distributed security returns.
3. The CAPM assumes that one specific factor explains security returns but APT does
not.
Which of the following answers is correct?
A) All statements are correct.
B) Statements 1 & 2 are correct and statement 3 is false.
C) Statements 1 & 3 are correct and statement 2 is false.
D) Only statement 3 is correct.

 

[sparty419]

D?

 

[mwvt9]

I haven’t looked at PM yet, but I would guess C.
Stmt 3 is correct, I think stmt 2 is wrong…I am unsure about stmt 1.

 

[Niblita75]

Agree I say D.
I’m pretty sure you don’t need a market portfolio for APT.

 

[N.VanCandidate]

I would say D as well…

 

[ruhi22]

Did PM a very long time back, but from what I remember, CAPM is just a special case of APT. I would go w/ C.

 

[mike0021]

D
APT does NOT need a market portfolio, so that knocks out A, B and C

 

[mcpass]

D for me too.

 

[wanderingcfa]

I like how the forum is getting up to speed with lots of participants and quick responses.
D is correct.
CAPM assumes normally distributed security returns, but APT does not. Unlike the CAPM, the APT does not require that one of the risk factors is the market portfolio. The CAPM can be considered a special restrictive case of the APT in which there is only one risk factor, and that one factor is restricted to be the market risk factor.

 

[westbruin]

wow, i felt a little wobbly on that one….
yes, APT doesn’t use market portfolio……. but i’m not totally sure how that eliminates statement 2 from being true……….
this question makes me think subscribing to schweser QBank is good idea. just doing thousands of questions.

 

[wanderingcfa]

westbruin Wrote:
——————————————————-
> wow, i felt a little wobbly on that one….
>
> yes, APT doesn’t use market portfolio……. but
> i’m not totally sure how that eliminates statement
> 2 from being true……….
>
> this question makes me think subscribing to
> schweser QBank is good idea. just doing thousands
> of questions.
Statement #2 is :NEITHER the CAPM nor APT assumes normally distributed security returns.
Obviously CAPM assumes normally distributed security returns, so that statement is false.

 

[westbruin]

wandering, thanks…………. seems like i’d do better with “hooked on phonics”….. read the questions properly, i have to keep telling myself.

 

[wanderingcfa]

Yea, I read questions wrong all the time.
We just need to remember during the test to take that extra 30 seconds and make sure we know what they are asking us.

 

[zimzim78]

Yeah, I initially said C), but after seeing the answer, I’m kicking myself.

 

[JoeyDVivre]

Actually statement #2 has been true for at least 10 or 15 years. There are scads of papers out there giving CAPM with non-normal security returns. I guess nobody has told CFAI yet. This is the internet age and they could google that “result”.
Edit: So the correct answer is E) Only 2 and 3 are true.