Using the S&P index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance.

Question

Quizplus · Accepted Answer

The S&P index is a broadly diversified portfolio that represents the overall market, and is often used as a benchmark for evaluating the performance of a portfolio manager. It is appropriate to use the S&P index as the proxy market portfolio when evaluating the manager's performance relative to the market. However, there is no evidence to suggest that using the S&P index as the benchmark will tend to underestimate the manager's performance. In fact, if the manager can outperform the S&P index, then their performance will be even more impressive.

Using the S&P Index as the Proxy Market Portfolio When