Monty Python and the Search for the Ultimate Index
Why is MSCI seeking something that was proved not to exist back in 1977 and then declared dead in 1992?
Will the Holy Grail of investing be found?
Photographer: John Downing/Express/Getty Images
The Financial Times reports that financial index provider MSCI Inc. has joined Sir Galahad, Indiana Jones and Monty Python in the quest for the Holy Grail. In this iteration the goal is not a cup, but the ultimate market portfolio. This modern crusade is based on a misunderstanding of 60-year-old work in quantitative finance, and seeks something that was proved not to exist back in 1977 and then declared dead in 1992.
The idea of a “market portfolio” originated with the Capital Asset Pricing Model in the early 1960s. Researchers realized that if they could identify one portfolio that was mean-variance efficient, meaning a portfolio that has the highest possible expected return for a given level of variance, they could price all capital assets. Several different economic arguments were advanced to claim that the market portfolio of all assets should be efficient. But even if those arguments were correct (they are not, and even at the time they were regarded only as possibly useful fictions) there could be lots of efficient portfolios, and no reason to assume the market portfolio is a good choice for any particular investor.