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“Reverse-Engineering” the Market Portfolio

Author

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  • Mihir Dash

    (School of Business, Alliance University, India)

Abstract

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.

Suggested Citation

  • Mihir Dash, 2017. "“Reverse-Engineering” the Market Portfolio," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 6(3), pages 151-156, September.
  • Handle: RePEc:ods:journl:v:6:y:2017:i:3:p:151-156
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    File URL: http://www.jami.org.ua/Papers/JAMI_6_3_151-156.pdf
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    References listed on IDEAS

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    1. Roll, Richard, 1978. "Ambiguity when Performance is Measured by the Securities Market Line," Journal of Finance, American Finance Association, vol. 33(4), pages 1051-1069, September.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    3. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    4. Mihir Dash, 2014. "Granger Causality and the Capital Asset Pricing Model," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 3(2), pages 68-73.
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    1. repec:ods:journl:v:6:y:2017:i:4:p:217-222 is not listed on IDEAS
    2. repec:ods:journl:v:7:y:2018:i:2:p:83-94 is not listed on IDEAS
    3. repec:ods:journl:v:7:y:2018:i:1:p:15-23 is not listed on IDEAS

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