Question

Can you please provide the explanation for the answer if possible. Thank you.

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

Answer 1

The CAPM model shows the excess return over systematic risk.

E(R)= Risk free rate + (Market return - risk free rate )* Beta

If actual return exceeds E(R) then it can be concluded that strategy beats the market during the testing period. So the answer is a)