Why Does an Equal-Weighted Portfolio Outperform Value- and Price-Weighted Portfolios?

We compare the performance of equal-, value-, and price-weighted portfolios of stocks in the major U.S. equity indices over the last four decades.

Author(s):

Yuliya PlyakhaGoethe

University FrankfurtRaman UppalEDHEC Business School

Grigory Vilkov

Goethe University Frankfurt

We find that the equal-weighted portfolio with monthly rebalancing outperforms the value- and price-weighted portfolios in terms of total mean return, four factor alpha, Sharpe ratio, and certainty-equivalent return, even though the equal-weighted portfolio has greater portfolio risk. The total return of the equal-weighted portfolio exceeds that of the value- and price-weighted because the equal-weighted portfolio has both a higher return for bearing systematic risk and a higher alpha when using the fourfactor model. The nonparametric test of Patton and Timmermann (2010) indicates that the differences in the total return of the equal-weighted portfolio and the value- and price-weighted portfolios is monotonically related to size, price, liquidity and idiosyncratic volatility; the relation with reversal is not monotonic, although the equal-weighted portfolio strongly outperforms the value- and price-weighted portfolios for the deciles with the lowest and the highest reversal characteristic. The higher systematic return of the equal-weighted portfolio arises from its higher exposure to the market, size, and value factors. The higher alpha of the equal-weighted portfolio arises from the monthly rebalancing required to maintain equal weights, which is implicitly a contrarian strategy that exploits reversal; thus, alpha depends only on the rebalancing frequency and not on the choice of initial weights.

Type: Working paper
Date: le 23/03/2012
Research Cluster : Finance

See Also

AGORA MEETS BERTRAND BADIE, POLITICAL SCIENTIST AND INTERNATIONAL RELATIONS SPECIALIST
News
- 21-10-2021
Agora students held another 'Rencontre de l'Agora' event on Wednesday 19 October, this...
Eiffel Excellence Scholarship: the most prestigious French scholarship you can get
News
- 21-10-2021
Mikhail Miroshnichenko joined EDHEC MiM Finance after his Bachelor’s degree in...
EDHEC-Auchan Learning Partnership: Retail industry transformations at the heart of EDHEC International BBA learning
News
- 20-10-2021
Auchan is joining forces with EDHEC to share its retail industry expertise with EDHEC...
The FIR-PRI Awards “Finance & Sustainability” prize for “best pedagogical innovation”: preparing future generations to fight climate change.
News
- 18-10-2021
At EDHEC, we want to take part in the fight against climate change. Through our...