Answer: Higher market beta

## Explanation Return smoothing occurs when hedge fund managers artificially adjust portfolio valuations to create more stable returns over time. Let's analyze each option: **A. Higher Sharpe ratio** - ✅ **CONSEQUENCE** - Return smoothing reduces volatility (standard deviation) in the denominator of the Sharpe ratio - Since returns are smoothed but the average return may remain similar, the Sharpe ratio increases **B. Lower volatility** - ✅ **CONSEQUENCE** - By smoothing returns, managers reduce the variability of returns over time - High returns are reduced and low returns are increased, creating a more stable return pattern **C. Higher serial correlation** - ✅ **CONSEQUENCE** - Return smoothing creates artificial persistence in returns - Current period returns become correlated with previous period returns due to the smoothing mechanism **D. Higher market beta** - ❌ **NOT A CONSEQUENCE** - Return smoothing does not necessarily increase the portfolio's sensitivity to market movements - Beta measures systematic risk relative to the market, and smoothing primarily affects the idiosyncratic component of returns - In fact, return smoothing might actually reduce measured beta by dampening the portfolio's response to market movements Therefore, higher market beta is **not** a consequence of return smoothing, making option D the correct answer.

Author: LeetQuiz .