aggregate fixed income market in the United States. We also include as asset classes emerging equity, emerging fixed income, and U.S. high yield, just to give a sense of how these more risky assets fit into the equilibrium framework. In Chapter 8 we discuss many issues that arise in attempting to define the market portfolio, whereas here we simply try to capture the substance of the equilibrium without too much detail. The matrix computations needed to compute the equilibrium are easily handled in a spreadsheet.

In Table 6.5 we show for the global market capitalization weighted portfolio the asset classes, the market capitalization weights, the annualized volatilities, the correlation with the global portfolio, and the equilibrium risk premiums. The total market capitalization of these assets as of the end of June 2002 is $26.7 trillion. The volatilities and correlations are estimated using daily excess returns relative to one-month London InterBank Offer Rate (LIBOR) from January 1980 through

TABLE 6.5 Global Equilibrium

Market Correlation Capitalization with Asset Weight Volatility Market Risk Premium Equity Australia

0.98% 16.00% 64 2.73%

Canada 1.22 17.80 77 3.66

France 2.23 20.43 74 4.03

Germany 1.64 22.04 70 4.16

Italy 0.87 24.91 56 3.70

Japan 5.06 19.52 56 2.91

Netherlands 1.39 18.48 77 3.80

Spain 0.69 23.46 66 4.17

Switzerland 1.87 18.36 74 3.62

United Kingdom 6.16 15.99 79 3.37

United States 30.10 15.82 94 4.00

Emerging markets 2.13 25.27 70 4.71

Government Bonds

Canada 0.69% 5.27% 24 0.33%

Europe 8.22 3.53 19 0.18

Japan 6.21 4.14 05 0.05

United Kingdom 1.15 6.06 22 0.36

U.S. aggregate 27.46 4.49 28 0.33

U.S. high yield 1.32 7.81 57 1.19

Emerging debt markets 0.73 15.52 61 2.52

Currency Exposures

Australia 0.30% 10.00% 28 0.75%

Canada 0.56 4.66 29 0.37

Europe 4.66 10.80 08 -0.22

Japan 3.50 12.13 12 0.40

Switzerland 0.58 11.54 14 -0.43

United Kingdom 2.27 9.24 04 -0.11