Using the S&P/TSX composite 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/TSX composite index is considered a broad market index and reflects the overall Canadian equity market. Using it as a proxy market portfolio is a reasonable approach to comparing a portfolio manager's performance. However, it is possible that a portfolio manager may outperform the index by investing in specific stocks or sectors that are not well-represented in the index. In this case, evaluating the portfolio manager's performance relative to the SML may provide a better indication of their skill in selecting securities. Therefore, using the S&P/TSX composite index as a proxy market portfolio is not likely to underestimate the manager's performance.

Using the S&P/TSX Composite Index as the Proxy Market Portfolio