The Market Portfolio is NOT Efficient: Evidences, Consequences and Easy to Avoid Errors
23 Pages Posted: 6 Mar 2016 Last revised: 18 Oct 2017
Date Written: October 17, 2017
The Market Portfolio is not an efficient portfolio. There are many evidences that tell us that: the equal weighted indexes have beaten their market-value weighted indexes for many years, many easy-to-build portfolios (some “smart-beta”, “multifactors”) have beaten market-value weighted indexes. We document evidences about seven Equal weighted indexes that have had higher returns than the corresponding market-value weighted index: S&P500, MSCI Emerging Markets, FTSE 100, MSCI World. MSCI, DAX 30 and IBEX 35.
However, many finance and investment books still recommend to diversify in the same relative proportions as in a broad market index such as the Standard & Poor’s 500, many funds compare their performance with the return of market-value weighted indexes.
Without homogeneous expectations, the market portfolio cannot be an efficient portfolio for all investors.
In this document we also cover: a) volatility and beta being bad measures of risk; b) the unhelpfulness of the Sharpe ratio; and c) common (and easy to avoid) errors in portfolio management and corporate finance.
Keywords: Unweighted indexes, Market unefficient, CAPM, Sharpe ratio, efficient portfolio
JEL Classification: G12, G31, M21
Suggested Citation: Suggested Citation