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.

Question

Quizplus · Accepted Answer

In an efficient market, it's generally expected that it would be difficult to consistently outperform the market on a risk-adjusted basis due to all available information being already reflected in stock prices. If a portfolio does outperform consistently, it suggests either an issue with the model used to evaluate that performance (such as the Capital Asset Pricing Model, or CAPM, which might not fully capture the dimensions of risk affecting returns) or that the market proxy (a benchmark used to represent the performance of the market, such as the S&P 500 for U.S. stocks) is not adequately representing the market the portfolio is compared against. Therefore, either the CAPM is not accurately capturing the risk-return relationship, or the proxy does not adequately represent the market, leading to the conclusion that either the CAPM is invalid or the proxy is inadequate.

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