If a Professionally Managed Portfolio Consistently Outperforms the Market Proxy

question 38

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 these

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Definitions:

Tax Rate

The percentage at which an individual or corporation is taxed by the government, which can vary based on income level, type of taxpayer, or type of income.

Debt-Equity Ratio

The debt-equity ratio is a measure of a company's financial leverage, indicating the ratio of its total debt to its shareholders' equity.

Unlevered Cost

A cost or rate of return analysis that does not include the impact of debt financing, reflecting the company's cost of capital without leverage.

Cost of Equity

The return that investors require for investing in a company's equity, representing the compensation for taking on the risk of investing in the company.