Question

6) Critically evaluate the following statement: If markets are semi-strong efficient, then CAPM alpha produced by an active fund manager can only be explained by either random luck, fraud or insider activity. (25 pts)

Answer 1

This given statement is TRUE because, In semi efficient form of market, all the publicly available information have already been discounted and all the privately available information have not been discounted into the share price so active fund managers cannot make an excess rate of return by having access to publicly available information.

Equity fund managers can only be making an additional rate of return through fraudulent activities or insider news because the privately available information has not been discounted into the stock price and he can also make an additional rate of return through access to the random informations or random luck because, in same efficient form of market the informations have already been discounted mostly and there are no scope for making an additional rate of return through public informations so he will be having an insider information in order to beat the rate of return of the index.

it is to be noted that Capital Asset pricing model Alpha is an excess rate of return over the risk-free rate of return so risk free rate of return will be indicated of index rate of return and it cannot be beaten by the Active fund manager