The “Market Model” In Investment Management

CURRENT INVESTMENT PRACTICE, much influenced by the literature of the past two decades on capital asset pricing, relies heavily upon the concept of the "market portfolio." It is believed that the market portfolio of all outstanding risky securities is the most appropriate construct, but that an acceptable substitute for each class of securities (or sector of the market) is provided by a broadly representative index of that sector. Preferred indexes include as many securities as possible with large outstanding value (capitalization), and weight those securities in proportion to outstanding value (capitalization weighting). There are several choices for U.S. equity indexes (for example, the SP this distinction is implemented through control of the portfolio sectoral exposure ("beta"), on the one hand, and policies concerning residual positions, on the other. Finally, consequent upon academic arguments for the efficiency of the market portfolio in the basic capital asset pricing model (CAPM), some scholarly discussions have argued that index funds are a cost-effective and