Does the Composition of the Market Portfolio Really
Matter?
Keith C. Brown
Gregory D. Brown
Journal of Portfolio
Management
13, 1987, pp. 26-32
Conventional measures of investment management
ability often rely on a specification of a benchmark indicator known as the
market portfolio. Past theoretical
research has shown that it is possible to generate exactly opposite performance
rankings for the same group of managers using two different market proxies. Can the empirical composition of this index
affect conclusions drawn about the performance of money managers? Using data from 1947 to 1978, this paper
measures the returns for a sample of 32 mutual funds against six different
definitions of the market portfolio. We
show that the rankings produced by these indexes are dramatically different and
conclude that the market proxy chosen is indeed a critical element of the
evaluation process. The optimal index
appears to be the one that best reflects the nature of the assets being tested.
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