Capital Market Indices and Portfolio Management

29 Pages Posted: 31 Aug 2007

See all articles by Thomas A. Rhee

Thomas A. Rhee

California State University, Long Beach

Date Written: August 26, 2007

Abstract

If E is the securities expected return vector, and b is the appropriate sensitivity vector for a vector of the securities common factors, F, then, the implied rational equilibrium vector F can be obtained by solving E=bF, if a set of the equilibrium E is known, i.e. F=b^(-1)E. Unfortunately the values of F are not unique, if we find any invertible matrix C such that F=b^(-1)C^(-1)CE. By weighting betas, however, one achieves the uniqueness. In any multifactor risk forecasting models, we also discover that economic factors in any multifactor securities pricing models are in fact returns on some style indexes. Based on these and other results, the paper attempts to synthesize refined single market risk models with a more general global risk model for individual securities. We propose a method to estimate the market portfolio as suggested in Capital Asset Pricing Model (CAPM). It is further shown that the mathematical restrictions placed on various factor loadings and our efforts to embed single market risk models into a global model contribute to analyzing portfolio performance attribution.

Keywords: Arbitrage portfolio, Arbitrage Pricing Theory, Multifactor securities pricing model, Identification of lambdas, Factor loadings, MSCI indexes, Market Portfolio, Single vs. Global Market Risk Forecasting Models, Capital Asset Pricing Model

JEL Classification: C51

Suggested Citation

Rhee, Thomas A., Capital Market Indices and Portfolio Management (August 26, 2007). Available at SSRN: https://ssrn.com/abstract=1010271 or http://dx.doi.org/10.2139/ssrn.1010271

Thomas A. Rhee (Contact Author)

California State University, Long Beach ( email )

1250 Bellflower Blvd
Long Beach, CA 90064
United States