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A World Market Cap Approach to Allocation

I think using market cap is a risky way to allocate. As Robert Arnott has shown with his "fundamentally" weighted indexes, cap weighting tends to overweight what's overvalued and underweight what is undervalued. How about looking at the fundamentals in the markets in question? GDP, or, the cumulative value of revenues, and/or dividends, of the public companies in those markets, might give a more realistic weighting criteria (Robert Arnott's other factors, book value and earnings, may be too difficult to compare from country to country due to varying financial reporting standards. Even revenue is probably not strictly comparable, but it is probably more comparable that earnings or book value). With the recent run-up in non-US stocks, particularly "emerging markets", a cap weighting is probably taking on excessive risk (despite the obvious attraction of being relatively easy to calculate).