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

Answer:

This given 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 " is completely TRUE because :

In semi efficient form of market, all the publicly available information is already assumed to be reflected in the share prices, but not privately held information. Share price will therefore not reflect information which has not been announced. Hence, semi efficient form of market says that share prices include all past share market information and non market information available to the public. The implication of this is that an investor cannot achieve positive risk adjusted returns on average. Hence, there is no way to systematically identify and take advantage of mispricings in the semi efficient market because they do not exist. If mispricings are identified, they are quickly arbitraged away and so, persistent patterns of market anomalies, that can be taken advantage of tend to be few.

CAPM Alpha is a measure of the excess active return on an investment, the performance of that investment compared with a suitable market index. In the given case, it is virtually impossible for the fund manager to produce CAPM alpha because of the reasons stated above, unless he had a very good luck to spot a rare mispricing, indulged in some kind of securities fraud or he had some vital non public insider information on which he acted, to produce the alpha.