If the assumptions of the CAPM are satisfied (

Finance Dec 25, 2020

If the assumptions of the CAPM are satisfied (.e., the CAPM holds), which of the following portfolios SHOULD have the highest Sharpe Ratio? A portfolio of large-cap stocks The market portfolio A portfolio of stocks with high CAPM betas O A portfolio of value stocks

Expert Solution

Option b: The Market Portfolio

If the assumptions of the CAPM are satisfied then all investors are thought to be holding the market portfolio because they are assumed to have the same expectations and investment opportunities. Here the Sharpe ratio will be highest.

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