I would not assume that she is appropriately challenged, just because she's performing at an average level. The setting appears to be rife with both adults and children (who take their cue from adults) who believe your DD does not belong there (though it sounds like she also has good friends). She clearly is a perceptive and sensitive child, who likely has figured out, consciously or otherwise, that she will most readily please her teacher by performing at a mediocre level. If she tested into the advanced group, then she should not be performing at an average level.
