Question

According to Bloomberg since 1964 Berkshire Hathaway (Warren Buffett’s firm) has delivered a total return of 2,500,000%, or a (geometric) average return of 20.62% per year.

However, the CAPM predicts that Berkshire Hathaway’s return should only have been 9.5% on average.

Why is this problematic for the CAPM?

1. It shows Berkshire Hathaway can generate large and persistent alpha.
2. It shows that Warren Buffett can generate large returns.
3. It shows that Berkshire Hathaway was a good stock to own.
4. Not enough information is given to answer this.

Answer 1

it is a representation that Berkshire Hathway has earned the total average return for a year of almost 21% whereas the expected rate of return as per Capital Asset pricing model have been just 9% so works your Hathway has continuously generated a larger amount of Alpha and which is persistent in nature so which is countering the philosophy of Capital Asset pricing model that Alpha been generated for a longer period of time.

All the other options are false.

correct answer will be option ( A/ it shows Berkshire Hathway can generate large and persistent Alpha.