Assume That as a Portfolio Manager the Beta of Your $\mathrm{RFR}=.08$

question 12

Multiple Choice

Assume that as a portfolio manager the beta of your portfolio is 1.3 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML? (1(1) $\mathrm{RFR}=.08$$\quad\quad R_{m}(\text { proxy }) =.11$
(2) $\mathrm{RK}_{\mathrm{K}}=.07$$\quad\quad\mathrm{R}_{\mathrm{m}}(\text { true }) =.14$

• A)4.2% lower
• B)3.6% lower
• C)3.8% lower
• D)4.2% higher
• E)3.6% higher

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Definitions:

Arbitragers

Individuals or entities that attempt to profit from price differences of the same or similar financial instruments, on different markets or in different forms.

Market Inefficiency

A condition where all available information is not fully incorporated into asset prices, leading to opportunities for higher returns.

Siamese Twin Companies

Companies listed in different countries that share an operational business but trade separately on the stock exchange.

Equity Carve-Outs

A type of corporate restructuring where a company creates a new, independent company by selling or distributing new shares of its existing division or subsidiary.