On the Market Portfolio for Multi-Asset Classes

Abstract

The influence of the CAPM theory on the financial theory of investment has increased with the development of passive management. Today, equity or fixed-income market portfolios can easily be defined using equity and fixed-income indexes. These indexes also play an important role in active management as they serve as benchmarks. The case of multi-asset classes is more complex. Indeed, indexes taking into account both stocks and bonds do not exist today. However, most investors need such references as their principal problem is to define their stock/bond asset mix policy. It is especially true for institutional investors like pension funds and long-term investors. In this article, we show how to compute the market portfolio of equity and fixed-income instruments. We then analyse the specificity of such a portfolio according to countries or regions and how this portfolio has changed over the last thirty years. The dynamics of the market portfolio also gives useful information about the evolution of ex-ante risk premia of stocks and bonds. Finally, we illustrate how the market portfolio could be used to benchmark diversified funds and to characterize the bets of long-term investment policy.