If a professionally-managed portfolio consistently outperforms the market proxy on a risk-adjusted basis and the market is efficient, it should be concluded that
A) the CAPM is invalid.
B) the proxy is inadequate.
C) either the CAPM is invalid or the proxy is inadequate.
D) the CAPM is valid and the proxy is adequate.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

In an efficient market, it's generally expected that no investor can consistently achieve higher risk-adjusted returns than the market average, as per the Efficient Market Hypothesis (EMH). If a portfolio does outperform the market on a risk-adjusted basis, it suggests either an issue with the Capital Asset Pricing Model (CAPM), which is a model used to determine a theoretically appropriate required rate of return of an asset, or with the market proxy used (e.g., an index that doesn't accurately represent the market). Therefore, either the CAPM is not perfectly capturing the way markets work, or the proxy is not a good representation of the market.

If a Professionally-Managed Portfolio Consistently Outperforms the Market Proxy on a Risk-Adjusted