Asset Pricing Model (CAPM), we often refer to the market portfolio, which includes all risky assets. Most of the original research on the CAPM was conducted using the U.S. stock market with the S&P 500 index representing the market portfolio. However, the actual market portfolio is not limited either geographically or in the scope of the asset classes. In later research, U.S. government and corporate bonds were often added to the market portfolio. This expanded the universe of securities covered by the market portfolio but by no means made it exhaustive. Other markets grew and developed, especially non-U.S. bonds and equity. As a result, investors were forced to expand their definition of the market portfolio. The market portfolio came to consist of global bonds and global equity. In addition, as the investable markets grew globally, many practitioners thought about how to include foreign currencies as part of the analysis. Indeed, any global investor is forced to consider currencies as an additional source of risk, potentially with either a positive or a negative expected return. This discussion is addressed in greater detail in Chapters 6 and 11. In this chapter we will address two basic questions: What does the market portfolio look like? What issues are associated with its construction? GLOBAL EQUITY Institutional investors use a variety of benchmarks for the global equity portion of their portfolios. These include the Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) and its regional components; the Salomon Smith Barney fSSB) Global Equity Index (GEI) and its regional components; and the Financial Times Stock Exchange (FTSE) All World global family of indexes. Note, however, that the FTSE All World is mostly used by European investors. The presence of these different global index groups and their varied use across the world imply that although indexes have many applications, not all indexes should be used with all applications. In light of our objective, which is to determine the best way to represent the global equity portion of the market portfolio, we outline in Table 8.1 several characteristics that are important to us. Since our objective is to find an efficient and manageable way to represent the