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Source Basis

Investment Foundations

Mission 9 · Lesson 7.1 — Test the Claim

Aswath Damodaran, Investment Philosophies (Session 8 of 38)

How this lesson uses themShow

Source-authentic claims and verified calculations follow Damodaran's 38-webcast Investment Philosophies course, Session 8 of 38: Market Efficiency II — testing market-beating schemes and strategies. William F. Sharpe's official Stanford article, The Sharpe Ratio (1994), controls the modern methodology: OPS uses (return minus risk-free rate) divided by standard deviation, with a clearly labelled 3% illustrative risk-free rate, rather than reproducing the session quiz's omission. The checklist, interactions, and guide dialogue are original OPS pedagogy. The option-listing and low-PE studies are dated historical evidence and are labelled as such; no live market data.

Mission 9Investment Foundations · Test the claim

Test the Claim

Anyone can show you a strategy that beat the market. Learn the three tests that decide whether it really did, the ten faults that sink most of the evidence, and the return a claim has to clear once risk and your own trading costs are both charged against it.

Your mission

Read an event window, compute a portfolio study's extreme spread, set up a regression correctly, pick the sampling design that survives the survivor problem, then write the checklist you will hold every future claim to.

Start testing ↓

35 minutesSeven guided decisionsOne saved evidence checklist

Guided evidence lab

0 of 8 stages complete

OPS Guide

To say a strategy earns more than it should, you need a model of what it should earn. So every test of a market-beating claim tests the strategy and that model together.

Read what excess returns can mean, then decide what a positive result actually proves.

Stage 1 of 8 · Joint test

You are always testing two things at once.

Definition · Excess return

The return a strategy earned above what its risk said it should earn. The phrase carries a hidden passenger: whatever model decided what it should have earned.

Three ways to get a positive result

1The strategy really did beat the market over that period.
2The risk model is the wrong model, so its expected return was too low.
3The risk model is right, but the strategy's risk was mismeasured.

Try itJoint hypothesis

A strategy shows excess returns after adjusting for risk with the CAPM. What does that establish?