“Reverse-Engineering” the Market Portfolio
Mihir Dash ()
Journal of Applied Management and Investments, 2017, vol. 6, issue 3, 151-156
The market portfolio plays a pivotal role in asset pricing. W. Sharpe proposed a model for the market portfolio based on optimizing the excess expected returns to total risk. Unfortunately, empirical studies using Sharpe's model in the CAPM explain asset expected returns only to a moderate extent. The present study proposes a model for the market portfolio which maximally explains expected returns of assets, under a given asset pricing model. This model is compared with five other constructions, viz. the equally-weighted portfolio, the value-weighted portfolio, the maximum returns portfolio, the minimum risk portfolio, and the Sharpe portfolio, in terms of their risk-return properties, the statistical properties of their implied SMLs, and their efficiency.
Keywords: market portfolio; Sharpe’s optimization model; coefficient of determination (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ods:journl:v:6:y:2017:i:3:p:151-156
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