3.3.2 What do we mean by ‘the market’?
The Capital Asset Pricing Model assumes that the market portfolio M includes all investible assets. This would include stocks, shares, works of art, commodities, property, and even our future earnings if these could be traded. This would be impossible to value in practice, so investment managers choose to represent the market by a stock-market index. Of course, different investors of different nationalities will look at different indices: the CAC40 for France, the S&P500 for the USA, for example. But even within countries there are a number of indices to choose from.
For example, in the UK, the index most cited on the news is the FTSE 100, which tracks the change in value of the top 100 shares listed on the London Stock Exchange weighted by market value. Every quarter, those companies that have fallen out of the top 100 are thrown out of the index and new large companies are included. In the USA, the most popular indices are the S&P500, a market-value-weighted index of 500 large US shares, and the NASDAQ Composite Index, a market-value-weighted index of all shares listed on the National Association of Securities Dealers Automated Quotation system, which consists primarily of shares in technology companies.
But the object of the CAPM is to represent the market as a whole and not the top 100 shares only. So, for our purposes, a more appropriate UK index would be the FTSE All Share Index, which in 2009 included 619 shares, weighted by market value, and these shares represented in value terms around 98 per cent of the value of all the shares listed on the market.
For a more global perspective, there is the MSCI World Index, but even this is designed to measure the equity market performance of only developed and not emerging markets. As of 2020, it consisted of the following 23 developed market indices, also weighted by market value: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, The Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the USA. You can see how difficult it is to define ‘the market’.