Calibrating Neutrality: The Evolving Global Opportunity Set

Modern portfolio theory suggests that investors can achieve maximum diversification holding a portfolio of risky assets reflecting the entire market, but no generally accepted method exists to construct such a portfolio.We present data on global equities and global fixed-income securities since 1990, and show that the relative weights of different asset classes have changed substantially, such that the market-neutral portfolio in these two major asset classes has not been constant over time. These results may be important for investors seeking to mimic the investable market, and could represent a benchmark for active allocation funds which principally hold equities and bonds.