Q2B.
Expert-verifiedConsider the statement: “If we can identify a portfolio that beats the S&P 500 Index portfolio, then we should reject the single-index CAPM.” Do you agree or disagree? Explain.
They may prove superior to the single-index model but are not practical.
Though it may be true or not, the single index CAPM is a form of correlation equation between two variables.
As of now, there are no tools i.e. index funds or ETFs to directly invest in the 500 index portfolio. These could even be superior to a single index yet they are not practical even for professional investors.
Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.
Portfolio | Expected Return | Beta |
X Y | 16% 12% | 1.00 0.25 |
In this situation you could conclude that portfolios X and Y:
a. Are in equilibrium.
b. Offer an arbitrage opportunity.
c. Are both under priced.
d. Are both fairly priced.
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