Question

Can you please provide the explanation for the answer if possible? Thank you!

0. To test whether an investment strategy beats the market, you have to adjust the returns on the strategy for risk. Assume that you test a strategy and find that it makes excess returns after adjusting for risk using the CAPM (with beta used to measure risk). Which of the following conclusions could you draw? (3 points) a. The strategy beat the market during the testing period b. The CAPM is not the right model for risk c The CAPM is the right model for risk but you misestimated the beta of your strategy Anv of the above

Answer 1

a. in general CAPM model provided good assurance and reasonable estimations to the market investment.

for calculation of CAPM we need inputs of risk free return, Beta value of stocks and market return. In this, beta value play a major role to determine the stock performance. If we failed to capture correct beta value, our estimation is going be wrong. Hence it should be taken correctly and accurately.

Hence, option C is correct answer.