Suppose Vanguard offers a market portfolio with positive expected return. Warren Buffett signed a contract with his two successors. The contract defines that the bonus of his successors in 2013 is determined by $0.1 Billion times the difference between their portfolio return and Vanguard’s market portfolio return in that same year. Question 31 What would be a better contract if CAPM is the correct model? Bonus can only be positive when the CAPM alpha is positive Bonus should not be correlated with the CAPM alpha Bonus can only be positive when the CAPM alpha is negative
Suppose Vanguard offers a market portfolio with positive expected return. Warren Buffett signed a contract with his two successors. The contract defines that the bonus of his successors in 2013 is determined by $0.1 Billion times the difference between their portfolio return and Vanguard’s market portfolio return in that same year. Question 31 What would be a better contract if CAPM is the correct model? Bonus can only be positive when the CAPM alpha is positive Bonus should not be correlated with the CAPM alpha Bonus can only be positive when the CAPM alpha is negative
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 13P
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Question
Suppose Vanguard offers a market portfolio with positive expected return. Warren Buffett signed a contract with his two successors. The contract defines that the bonus of his successors in 2013 is determined by $0.1 Billion times the difference between their portfolio return and Vanguard’s market portfolio return in that same year.
Question 31
What would be a better contract if
Bonus can only be positive when the CAPM alpha is positive
Bonus should not be correlated with the CAPM alpha
Bonus can only be positive when the CAPM alpha is negative
Bonus should be determined by the CAPM beta instead
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