Everybody is in search of the next big investment opportunity. Many online gurus promise to have found the secret to earn incredible returns, which they want to share with you for a few thousand of your hard-earned money. The latest investment craze, cryptocurrency, is often advertised as the way to earn outrageous returns. Foreign exchange (FX) trading bots are also a popular tool.
It is only human to dream of consistently earning high returns. However, financial theories like the Capital Asset Pricing Model (CAPM) and the Efficient Markets Theory (EMT) teach us that such goals are not realistic. In this article, we'll explore why, based on CAPM and EMT, earning a consistent 2% weekly return is financial fantasy.

Understanding the CAPM Model

CAPM is a financial model developed to help investors evaluate the relationship between an investment's expected return and its risk. It is a fundamental concept in modern finance and plays a critical role in assessing the attractiveness of investment opportunities. At the core of CAPM is the principle that investors demand higher returns for taking on risk. Vice versa, higher returns are almost always tied to higher risk. According to the CAPM framework, it is not possible to achieve returns in excess of the market return without incurring risk in excess of market risk.

The Efficient Markets Theory

EMT, closely linked to the CAPM model, posits that financial markets are incredibly efficient in processing and reflecting all available information in asset prices. This means that all relevant news, data, and analysis are swiftly incorporated into stock prices. In an efficient market, it is very hard to gain an edge by analyzing publicly available information, making it difficult to consistently earn returns in excess of the market average.

Why Consistent 2% Weekly Returns Are Impossible

1. Market Efficiency: According to EMT, markets are highly efficient. This means that even if an investment opportunity offering a 2% weekly return did exist at some point, it would be quickly recognized and capitalized upon by other investors. Market participants, such as institutional investors and market makers, would bring prices back in line with underlying fundamentals. As more investors pile into such opportunities, the excess returns would diminish, eventually settling at a level consistent with the prevailing risk-free rate and the investment's beta. The efficiency of markets means that opportunities for excess returns are quickly crowded out.

2. Risk-Return Tradeoff: CAPM reinforces the principle that there's a direct relationship between risk and return. Investments that promise exceptionally high returns typically come with commensurately high levels of risk. A 2% weekly return would imply substantial risk, well beyond what most investors can comfortably bear. To achieve such returns, one would likely have to engage in leveraged strategies that expose them to significant downside risk. More likely, the returns advertised are a lie, and you are being scammed.

Conclusion

No matter how convincing the sales pitch, anyone trying to involve you in a scheme with a guaranteed return of 2% per week is lying.

As the CAPM teaches us, higher expected return is almost always tied to higher expected risk. A risk-free way to earn in excess of the market return does not and cannot exist. As the EMT teaches us, opportunities to earn excess returns are scarce, and the window of opportunity closes quickly. Consistently achieving returns in excess of the market return is very hard, and only achieved by a select few which achieve returns within reasonable proximity of the market return. If there would be an easy way to achieve excess returns consistently, everybody would do it, crowding the trade and thus eliminating the excess return opportunity.

Excessive promises like this should get your alarm bells ringing. If history is any guide, outrageous returns are typically promised by fraudsters, not by genius investors. Knowledgeable investors should focus on building wealth at a moderate pace, without falling for get-rich-quick schemes. The power of compound interest, the eighth world wonder according to Albert Einstein, is a great gift to give to yourself and your (future) offspring. Appreciate it while you can, instead of falling for the latest conman.