Roll's Critique

If you’re a pro investor (or just watch Cramer endlessly), you’ve no doubt heard of the capital asset pricing model (CAPM). CAPM is a widely used strategy by investors, who abide by its advice to diversify, diversify, diversify. Don’t put all those eggs in one basket.

Economist Richard Roll (brother of Tootsie) believed that you can’t actually create a diversified market portfolio, at least not without investing in every investment in every market...all commodities, rare items...anything and everything with value that’s being sold as an investment.

Anything else is just trying to set up a proxy version of a balanced, diversified portfolio, even if it follows a market index. For instance, CAPM relies on the S&P 500 as a base for overall market return. Roll’s says it's very narrow-minded to assume that any one market, index, or what-have-you could accurately approximate the entire market.