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

question 1

Multiple Choice

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.

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Definitions:

Total Economic Costs

The sum of all costs associated with the production of a good or service, including both explicit (direct) costs and implicit (indirect or opportunity) costs.

Implicit Cost

The opportunity costs of using resources that a firm already owns to make its products, as opposed to renting, selling, or using them in another way.

Forgone Rent

The potential income lost by choosing to use a property or resource in a way that is not financially optimal or by not using it at all.

Economic Profits

The surplus generated from business activities after accounting for both explicit and implicit costs, including opportunity costs, representing above-normal returns.