If the wrong benchmark (or market portfolio) is selected then
A) Computed betas would be wrong.
B) The SML would be wrong.
C) Computed betas would be correct.
D) Choices a and b.
E) Choices b and c.

Question

Quizplus · Accepted Answer

If the wrong benchmark (or market portfolio) is selected, the computed betas would be wrong because they would be measuring the stock's sensitivity to the wrong market factors. This would result in an incorrect SML, as the betas used to calculate the required return would be incorrect. Therefore, the best choice is D, as both choices A and B are true.

If the Wrong Benchmark (Or Market Portfolio) Is Selected Then