The efficient markets model says that any strategy during this period had expected return of 50%.
Wait, I think this is wrong. It actually says that any beta 1 strategy had the same expected return as the market as a whole. If my portfolio had a beta of 2, for example, either by using leverage or by buying only high beta stocks, then my expected return would be double that of the market.
I wish I could say that I kept my portfolio’s beta at or below 1 at all times, which would make the reasoning easier, but I did sometimes trade derivatives that arguably had high beta. It would be pretty cumbersome to calculate the exact overall beta, but I’d guess that the average over time probably wasn’t more than 1.5, so you could perhaps redo your reasoning using that.
See my answer to Paul below. Same thing applies for the CAPM: it’s an approximation, and the expected value formula is the efficiency condition which correctly accounts for how much margin one should actually expect to be able to get, as well as the effect of margin calls.
(In the expected value formula, beta is wrapped into the discount factor; the CAPM approximation pulls it out.)
Wait, I think this is wrong. It actually says that any beta 1 strategy had the same expected return as the market as a whole. If my portfolio had a beta of 2, for example, either by using leverage or by buying only high beta stocks, then my expected return would be double that of the market.
I wish I could say that I kept my portfolio’s beta at or below 1 at all times, which would make the reasoning easier, but I did sometimes trade derivatives that arguably had high beta. It would be pretty cumbersome to calculate the exact overall beta, but I’d guess that the average over time probably wasn’t more than 1.5, so you could perhaps redo your reasoning using that.
See my answer to Paul below. Same thing applies for the CAPM: it’s an approximation, and the expected value formula is the efficiency condition which correctly accounts for how much margin one should actually expect to be able to get, as well as the effect of margin calls.
(In the expected value formula, beta is wrapped into the discount factor; the CAPM approximation pulls it out.)