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Does the efficient market hypothesis imply that it is impossible for an investment manager to outperform a stock market benchmark (such as the S&P 500 for US large capitalization stocks) on a risk adjusted basis? Explain

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019
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Related questions

“Money managers that outperform the market on a risk-adjusted basis in one year are likely to outperform in the following year”. Is this in violation of the Efficient Market Hypothesis?

2. In some detail, describe the portfolio management process. Explain how active managers can add value relative to their benchmark. Explain how it is possible for a portfolio manager to outperform a benchmark but fail to meet the client’s investment objective. Why does passive always beat active?

Use the Security Market Line method and information below to determine the cost of equity (aka expected return) for Stock A and Stock B.

The risk free rate is based solely on the on the US treasury yield curve

The equity market (i.e. the S&P 500) is expected to return 10.0%

Stock A has a beta (sensitivity to the S&P 500) of 0.80

Stock B has a beta (sensitivity to the S&P 500) of 1.20

Assume the risk free rate is 2.0%. Which of the following statements is FALSE:

A) Stock A is less sensitive to the performance of the S&P 500

B) Both stocks have the same risk free rate

C) Stock B has a larger market risk premium because it has a higher beta

D) Stock B is expected to outperform Stock A by 2.2%

E) Stock A is expected to return 8.4%

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