Question
Robert, is an investment manager who recently dealt with a customer by the name of Grace. After performing a Capital Asset Pricing Model (CAPM) analysis
Robert, is an investment manager who recently dealt with a customer by the name of Grace. After performing a Capital Asset Pricing Model (CAPM) analysis using the S&P500 as the proxy of the market portfolio, Grace argued that her portfolio had outperformed the market. Robert uses the CAPM as an investment performance measure and finds that Graces portfolio plots below the Security Market Line (SML). Robert argued that Graces porfolios excellent performance is due to the selection of a wrong proxy of the market portfolio, not brilliant active investment management. Support Roberts argument by explaining the likely effects of a false proxy of the market portfolio on both the market risk and the SMLs slope.
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