The concept of a world market portfolio features prominently in many financial theories and models and serves as an important foundation of our asset allocation work for our clients. The world market portfolio is the collection of all assets available to investors in proportion to their relative market value. Therefore, information about the market portfolio:
- Describes the aggregate portfolio of all investors
- Describes the investment opportunity set
- Can serve as a neutral or starting point when establishing long-term asset allocation policies based on circumstances and objectives (e.g., risk, liquidity, time horizon), or views driven by information that is better than everyone else’s (e.g., long-term capital market forecasts, medium-term views)
- Can serve as a benchmark for strategic asset allocation
In this paper, we estimate how the global market has allocated its collective wealth among competing investment opportunities from a U.S.-based investor point of view. As such, all the estimates are quoted in U.S. dollars. By definition, finance theory assumes that the market portfolio consists of both traded and non-traded assets (human capital, durable consumer goods, etc.). However, it is difficult to construct a good proxy for the market portfolio in the real world that captures all sources of assets. Therefore, we exclude categories like human capital and consumer goods and focus on measuring the values of the capital market securities that make up the opportunity set faced by most investors.
To learn more about the global capital invested market, download the full whitepaper above.
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