Question

A long-short strategy consistently delivering significant alpha suggests that

Select one:

a. the market is inefficient.

b. the asset pricing model to determine alpha may be wrong.

c. we may have looked too much into the data – there is always a pattern if one looks hard enough!

d. there might be limits to arbitrage (i.e., practical challenges that stop informed investors from arbitraging alpha away, such as transaction costs).

e. All of these statements are plausible.

Answer 1

Long shorts strategy is involving buying the undervalued shares and shorting the overvalued shares so if this strategy is delivering consistent returns, it will mean that the market is inefficient because all the informations related to the the stock has not been discounted into the price and still these markets are inefficient because they are not reflecting the true value of the shares and there is a difference between the price and the valuae so active investors are also making a higher rate of return then the index.

All the other options are false because they are reflecting model is false.

Correct answer will be option (A) the market is inefficient.