The Market Portfolio is NOT Efficient: Evidences, Consequences and Easy to Avoid Errors

23 Pages Posted: 6 Mar 2016 Last revised: 21 Mar 2016

Pablo Fernandez

University of Navarra - IESE Business School

Jose Paulo Carelli

ISE Business School

Alberto Ortiz Pizarro

University of Navarra, IESE Business School

Date Written: March 16, 2016

Abstract

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

Fernandez, Pablo and Carelli, Jose Paulo and Ortiz Pizarro, Alberto, The Market Portfolio is NOT Efficient: Evidences, Consequences and Easy to Avoid Errors (March 16, 2016). Available at SSRN: https://ssrn.com/abstract=2741083 or http://dx.doi.org/10.2139/ssrn.2741083

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

Jose Paulo Carelli

ISE Business School ( email )

Martiniano de Carvalho, 573 - Bela Vista
São Paulo, 01321001
Brazil

Alberto Ortiz Pizarro

University of Navarra, IESE Business School ( email )

Camino del Cerro del Águila, 3
Madrid, 28023
Spain

Paper statistics

Downloads
2,364
Rank
4,106
Abstract Views
6,433