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

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Any investment can be viewed in terms of risk and return the CAPM is the form... View the full answer