have found that they are very similar. In fact, as shown in Table 8.5, a regression of MSCI country indexes on their local counterparts indicates that almost all variation in the local indexes can be explained by the MSCI indexes. On the other hand, both the annualized tracking error and the average difference in annual returns shown in Table 8.6 are significantly different from zero. One explanation for this difference is the variety of methodologies employed in constructing local market indexes. Most local indexes are capitalization weighted; however, not all are adjusted for free float. In addition, security selection methodology for inclusion in the index is different between countries. In several instances, for example, the index represents a couple dozen of the most often traded stocks on the local stock exchange. Now that we have discussed all three alternative ways of representing global equity in the market portfolio, we can turn back to Table 8.1, which outlines characteristics we consider desirable. Consider the following characteristics: consistent index methodology across countries, historical availability, and total market representation. Most of the commonly used local indexes do not satisfy these criteria. Take, for instance, the S&P 500 for the United States. The S&P 500 is a capitalization-weighted index that includes 500 stocks chosen based on their liquidity, market size, and industry group to represent the U.S. equity market. However, stock inclusion in the S&P 500 is determined by a committee rather than by a set of well-defined rules and hence has been a topic of debate. Also, the index methodology TABLE 8.5 Variation in Local Indexes in Relation to MSCI Indexes   Country Local Index Beta* Intercept* R-Squared United States S&P 500 1.00 0.00 1.00 United Kingdom FTSE 100 0.99 0.00 0.99 Germany DAX Xetra 0.98 0.00 0.97 Japan Nikkei 225 0.97 0.00 0.87 France CAC40 1.06 0.00 0.98 *Beta is statistically significant on a 1 percent level, whereas the hypothesis that the intercept is equal to zero could not be rejected. TABLE 8.6 Annualized Tracking Error and Average Difference in Annual Returns       Tracking Error Average Country Local Index (bps) Difference United States S&P 500 105 -3.1% United Kingdom FTSE 100 196 -2.7 Germany DAX Xetra 361 -1.0 Japan Nikkei 225 731 -3.1 France CAC40 305 -1.1