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Value-Weighted Returns as a Market Portfolio Proxy

Article Quant Q&A · Author: soandos
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Summary

The document explains CRSP’s value-weighted return series as returns on a market portfolio proxy. In a value-weighted portfolio, securities contribute according to their market values, so a defined set of traded stocks can be combined into an aggregate return. The index described includes distributions and excludes American Depository Receipts; the passage does not specify its full constituent universe or calculation details.

The answer connects the measure to asset-pricing frameworks such as CAPM and APT, where a market portfolio serves as a theoretical benchmark. Because the theoretical market portfolio would encompass far more than listed stocks, empirical work relies on proxies built from available securities. Researchers can use such proxies to test asset-pricing hypotheses or construct portfolios based on relationships to market returns. The index is meaningful as a proxy whose usefulness depends on its coverage and intended application; it should not be mistaken for a literal portfolio of every asset in the economy.

Key ideas

  • A value-weighted return aggregates constituent returns according to their market values.
  • The described CRSP series includes distributions and excludes American Depository Receipts.
  • Empirical asset-pricing work uses traded securities as proxies for a much broader theoretical market portfolio.
  • Market portfolio proxies can support tests of CAPM- or APT-related hypotheses.
  • The interpretation of an index depends on which securities it includes.

Tags

EquitiesPortfolio constructionFactor investingUS markets
Full text
# Value Weighted Return


# Value Weighted Return












I recently have started to look at some data from CRSP, and they have a metric called Value Weighted Return (two versions with and without distributions).

When I looked it up, it seemed that this metric was not used anywhere else, and the explanation on the site did not help (quoted below):

> VWRETD indices contain either the daily or monthly returns, including all distributions, on a value-weighted market portfolio (excluding American Depository Receipts (ADRs)).

How is this useful? What is the portfolio? If we don't know the portfolio, what makes this number meaningful?

## Answer by Aksakal almost surely binary (score 0)

https://quant.stackexchange.com/a/10711

your question is related to the concept of the market portfolio in CAPM and similar approaches in asset pricing. in theory this market portfolio includes all assets imaginable, not only stocks but everything from land to resources on Earth. in practice, it is represented by proxies, i.e. the substitutes, which are usually the traded securities. it's actually even more restricted to something like S&P 500 stocks, i.e. 500 largest equities. once you figure out which stocks you include, it's easy to compute the value-weighted return on them.

the usefulness of these indices in their relation to asset pricing theory, such as CAPM or APT. you can test various hypotheses based on these theories. you can also form portfolios based on correlations to the market portfolios (actually, their proxies)

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.