Your friend tells you that ABC Mutual Fund can beat the market return and has less risk than the market.Is this possible?
A) In the short-run, yes. In the long-run, no.
B) In the short-run, yes. In the long-run, yes.
C) In the short-run, no. In the long-run, no.
D) In the short-run, no. In the long-run, yes.

Question

Quizplus · Accepted Answer

Your friend is suggesting that fund plots above the SML. The SML indicates the long-run "expected" return. So, in the long-run all assets (and funds) plot on the SML. However, in the short-run a fund's (or asset's) return will vary around the average (expected value) and so the fund could out-perform the SML for brief periods of time.

Your Friend Tells You That ABC Mutual Fund Can Beat