If a Market Proxy Portfolio Consistently Beats All Professionally-Managed Portfolios

question 20

Multiple Choice

If a market proxy portfolio consistently beats all professionally-managed portfolios on a risk-adjusted basis, it may be concluded that

• A) the CAPM is valid.
• B) the market proxy is mean/variance efficient.
• C) the CAPM is invalid.
• D) the CAPM is valid and the market proxy is mean/variance efficient.
• E) the market proxy is mean/variance efficient and the CAPM is invalid.

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Definitions:

Market Portfolio

A portfolio consisting of all stocks.

Correlation

A statistical measure that describes the extent to which two variables change together, and thus how well one variable can predict the other.

Weighted Average

A calculation that takes into account the varying degrees of importance of the numbers in a data set, often used in financial metrics like WACC.

Standard Deviations

A measure of the dispersion or variation in a set of values, used to indicate volatility in financial markets.