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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