Question

Which of the following statements is false?

A	When a stock’s alpha is not zero, investors can improve upon the performance of the market portfolio.
B	An important conclusion of the CAPM is that only sophisticated investors with superior trading skills should hold the market portfolio (combined with risk-free investments).
C	The Sharpe ratio of a portfolio will increase if the investor buys stocks whose expected returns exceed their required returns, that is, if he buys stocks with positive alphas.
D	The Sharpe ratio of a portfolio will decrease if the investor buys stocks with negative alphas.
E	None of the above

Answer 1

Statement b is FALSE.

An important conclusion of the CAPM is that only sophisticated investors with superior trading skills should hold the market portfolio (combined with risk-free investments).

CAPM does not draw such conclusion. In fact, any investor can hold the market portfolio, which is an efficient portfolio.

The other statements are TRUE

• When the alpha of a stock is not equal to zero, the performance of the market can be improved. Investors can look for stocks that generate positive alpha.
• The Sharpe ratio increases with including stocks that have positive alpha
• The Sharpe ratio decreases with including stocks that have negative alpha