Benchmark Portfolio Inefficiency and Deviations from the Security Market Line

  • Author(s): RICHARD C. GREEN
  • Published: Apr 30, 2012
  • Pages: 295-312
  • DOI: 10.1111/j.1540-6261.1986.tb05037.x


This paper theoretically evaluates the robustness of the Security Market Line relationship when the market proxy employed is not mean‐variance efficient. The analysis focuses on the behavior of the “benchmark errors,” the deviations of assets and portfolios from the Security Market Line. First, we characterize how the location of an asset in mean‐variance space determines its benchmark error. Then the continuity properties of the benchmark errors are studied. The results indicate that the magnitudes of the errors exhibit continuous but not uniformly continuous behaviors. The relative rankings based on deviations from the Security Market Line, however, exhibit some severe discontinuities. In fact, these can be exactly reversed for two proxies arbitrarily close in mean‐variance space.

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