Suppose Vanguard offers a market portfolio with positive expected return. Warren Buffett signed a contract with his two successors. The contract defines that the bonus of his successors in 2013 is determined by $0.1 Billion times the difference between their portfolio return and Vanguards market portfolio return in that same year.

Question 31

What would be a better contract if CAPM is the correct model?

		Bonus can only be positive when the CAPM alpha is positive
		Bonus should not be correlated with the CAPM alpha
		Bonus can only be positive when the CAPM alpha is negative
		Bonus should be determined by the CAPM beta instead