DEFINITION of 'Roll's Critique'
An economic idea that suggests that it is impossible to create or observe a truly diversified market portfolio (one of the key variables of the capital asset pricing model (CAPM)). According to this view, a true "market portfolio" would include every investment in every market, including commodities, collectibles and virtually anything with marketable value. Those who still use the CAPM do so with a market index, such as the S&P 500, as a proxy for the overall market. The critique is attributed to economist Richard Roll.
BREAKING DOWN 'Roll's Critique'
The equations that make up the CAPM are highly sensitive to the initial variables. A small change in the market rate of return (as it is entered in the formula) can have a large impact on the solution set. The CAPM presents a solid framework for adding an investment to a diversified portfolio, but due to Roll's critique and others, many researchers have expanded to different models. Roll's critique reminds us of the important fact that we can only diversify so much, and that our attempts to know the market as a whole remain just that  attempts.

Systematic Risk
The risk inherent to the entire market or entire market segment. ... 
Asset Allocation
An investment strategy that aims to balance risk and reward by ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
Diversification
A risk management technique that mixes a wide variety of investments ... 
Financial Modeling
The process by which a firm constructs a financial representation ... 
PutCall Parity
A principle that defines the relationship between the price of ...

Fundamental Analysis
The Capital Asset Pricing Model: An Overview
CAPM helps you determine what return you deserve for putting your money at risk. 
Fundamental Analysis
Catch On To The CCAPM
The consumption capital asset pricing model smoothes over some of CAPM's weaknesses to make sense of risk aversion. 
Active Trading
Modern Portfolio Theory: Why It's Still Hip
See why investors today still follow this old set of principles that reduce risk and increase returns through diversification. 
Investing Basics
What Does In Specie Mean?
In specie describes the distribution of an asset in its physical form instead of cash. 
Economics
Calculating Cross Elasticity of Demand
Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another. 
Fundamental Analysis
Emerging Markets: Analyzing Colombia's GDP
With a backdrop of armed rebels and drug cartels, the journey for the Colombian economy has been anything but easy. 
Fundamental Analysis
Emerging Markets: Analyzing Chile's GDP
Chile has become one of the great economic success stories of Latin America. 
Investing
Watch Your Duration When Rates Rise
While recent market volatility is leading investors to look for the nearest exit, here are some suggestions for bond exposure in attractive sectors. 
Economics
Explaining Capital Flows
The movement of money for investing, trade or business production, is commonly referred to as capital flows. 
Investing
Yellow Light Trade Risk Management
Being in the stock market for so long I tend to look at the world through the eyes of a trader, but how to decide when we are presented with two options?

What is the utility function and how is it calculated?
In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >> 
How can I use a regression to see the correlation between prices and interest rates?
In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >> 
How is the expected market return determined when calculating market risk premium?
In some cases, brokerage firms provide an expected market rate of return based on an investor's portfolio composition, risk ... Read Full Answer >> 
How do I calculate a modified duration using Matlab?
The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >> 
How do I calculate the rule of 72 using Matlab?
In finance, the rule of 72 is a useful shortcut to assess how long it takes an investment to double given its annual growth ... Read Full Answer >> 
How do I calculate the standard error using Matlab?
In statistics, the standard error is the standard deviation of the sampling statistical measure, usually the sample mean. ... Read Full Answer >>