Does Finance Theory Make the Case for Capitalisation- Weighted Indexing?

Proponents of cap-weighted stock market indices often argue that such indices provide efficient risk/return portfolios.

Author(s):

Felix Goltz

Head of applied research at EDHEC-Risk Institute

Veronique Le Sourd

Senior research engineer at EDHEC-Risk Institute.

This paper reviews the evidence in the academic literature and concludes that only under very unrealistic assumptions would such indices be efficient investments. In the presence of realistic constraints and frictions, cap-weighted indices cannot, according to the academic literature, be expected to be efficient investments.

Type: EDHEC Publication
Date: le 11/01/2010
Research Cluster : Finance

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