Purchase Solution

Testing claim of beating the market

Not what you're looking for?

Ask Custom Question

You are considering hiring an investment advisor to help you manage your portfolio. This advisor tells you that she has consistently "beaten the market" over the last 5 years. You ask the advisor to prove her claim.
a. In words, describe what it would mean for her to have "beaten the market." You may refer to CAPM as needed to develop your answer.
b. Devise a test of her claim that she has beaten the market. What data would you need to carry out this test?
c. She responds to you by saying that her portfolio has beaten the S&P 500's return for each of the past 5 years (and the S&P has gone up each of those years.) Is this proof that she has beaten the market?

Purchase this Solution

Solution Summary

How to determine whether a portfolio has beaten the market

Solution Preview

a. It means to have earned a rate of return in excess of that predicted by the capital market line:
Rp=rf+β(RMP)

b. We first calculate the beta of the advisor's ...

Purchase this Solution


Free BrainMass Quizzes
Motivation

This tests some key elements of major motivation theories.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.