Volume 14, Number 3, Third Quarter 2016
The perception that it’s hard to beat the market portfolio is widespread. Indeed, passive investment has more than doubled in the last decade. While various different strategies have been suggested to outperform passive indexing, the market is still considered by many as the relevant benchmark to beat. The evidence in this paper suggests that this perception requires a fundamental re-examination. We compare the market with a large number of randomly constructed and passively held portfolios. We find that 69% of these random portfolios yield higher Sharpe ratios than the market. Practical implications and theoretical consequences for market equilibrium are discussed.