If an incorrect proxy market portfolio such as the S&P index is used when developing the security market line, the slope of the line will tend to be underestimated.

Question

Quizplus · Accepted Answer

The proxy market portfolio used to develop the security market line should be representative of the overall market's risk and return characteristics. If an incorrect proxy is used, such as the S&P index, which may not be fully representative of the market, the slope of the security market line may tend to underestimate the true risk-return relationship, leading to incorrect pricing and portfolio decisions.

If an Incorrect Proxy Market Portfolio Such as the S&P