Historical Returns of the Market Portfolio Thursday, 10 August, 2017

Out of curiosity, what is benchmark return for each active trader/investor ...

Authors: Doeswijk, Lam, Swinkels

Title: Historical Returns of the Market Portfolio

Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2978509

Abstract:

Using a newly constructed unique dataset, this study is the first to document returns of the market portfolio for a long period and with a high level of detail. Our market portfolio basically contains all assets in which financial investors have invested. We analyze nominal, real, and excess return and risk characteristics of this global multi-asset market portfolio and the asset categories over the period 1960 to 2015. The global market portfolio realizes a compounded real return of 4.38% with a standard deviation of 11.6% from 1960 until 2015. In the inflationary period from 1960 to 1979, the compounded real return of the GMP is 2.27%, while this is 5.57% in the disinflationary period from 1980 to 2015. The reward for the average investor is a compounded return of 3.24%-points above the saver’s. We also compare the performance of an investor who holds the market portfolio with an investor who uses simple heuristics for the portfolio allocation. Our results suggest that the market portfolio is close to the mean-variance frontier, but our heuristic allocations achieve a significantly higher reward for risk.

Notable quotations from the academic research paper:

"This study aims to fill both a gap in the academic literature as well as a gap in return data availability for finance practitioners by providing returns of the global market portfolio (GMP) over the period 1960 to 2015 from the perspective of an USD investor. A study on returns of the GMP has not been done before for such a long period and with such a level of detail. We document in detail how we collected historical returns data on global asset classes, which is challenging for the period before 1985. Moreover, we make the resulting data publicly available so other researchers can use them in their own applications. Our GMP basically contains all assets in which financial investors have invested.

This paper contains unique features compared to the scarce academic literature on international asset returns. First, our sample period significantly extends the 1960-1980 period of Ibbotson and Siegel (1983), who are the first with a rigorous study on a global multi-asset market portfolio. They find a nominal compounded return of 8.36% for their so-called world market wealth portfolio over the period 1960-1980. Compared to that study, we focus on assets in which financial investors have actually invested. For example, we do not take farmland into account, as it usually belongs to owners that do not hold it as a financial investment and thereby it is not publicly available.

Second, in comparison with Dimson, Marsh, and Staunton (2002), a groundbreaking study that documents annual returns for equities, government bonds, and treasury bills in sixteen countries for the 101-year period 1900-2000, we include returns for more assets like for example corporate bonds and real estate. Also, we use an all-maturity market capitalization weighted government bonds index instead of a GDP-weighted long term government bonds index. The latter is less useful for representing the performance of the asset class global government bonds. Obviously, the length of their sample period remains unmatched.

New data enables an extensive analysis of return and risk characteristics of the GMP and the asset categories over the period 1960 to 2015. We include conditional analyses on recessionary and inflationary periods. We also compare the performance of an investor who holds the GMP with an investor who uses simple heuristics for the portfolio allocation. By comparing the performance of the GMP with alternative portfolio allocation schemes, we can find out whether the GMP has been a good, if not optimal, portfolio during our 56-year sample period. This analysis will also touch upon mean-reversion across asset classes. Moreover, this new data set provides an opportunity to gauge the difference in return and risk for the average investor and saver."


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