Yes, the Composition of the Market Portfolio Matters

Résumé du livre

Market portfolio composition substantially affects cost of equity estimates. Adding Treasury securities to an equity-only market portfolio substantially changes both estimated market betas and the estimated market excess return. Though the sign and magnitude of the net impact of these changes is uncertain, they dramatically impact costs of equity for 30 industry portfolios under both the CAPM and Fama-French 3-Factor model. The choice of market portfolio proxy is as important as the choice of pricing model when estimating costs of equity. Similar conclusions hold when we add real estate, corporate debt and international securities to the market portfolio.