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

Question

Quizplus · Accepted Answer

This is because an incorrect proxy market portfolio will not fully capture the systematic risk of the overall market, leading to an underestimation of the required return for a given level of systematic risk.

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