Jensen (1968)Links to an external site. proposed a very influential idea: when assessing mutual fund performance, we should compare funds only after accounting for the risks they take (rather than simply comparing returns). To see his argument, draw a SML, and put one dot above the SML (call it A) and one dot below it (call it B) while A and B have the same beta.

(a) Describe the investment opportunities here.

Group of answer choices

A. Buy A and sell B in a way that the portfolio has zero market beta

B. Just buy A to reach the highest possible return

C. Buy B and sell A in a way that the portfolio has zero market beta

(b) Suppose you take one of these investment opportunities. What market movements are you exposed to? Hint: Can you think about protecting yourself against market conditions?

A. The positive movements

B. No exposure

C. The negative movements