Alternatives To Cap-Weighted Indices PDF

EDHEC Institutional Days
Monaco, December 8th, 2010, 14:15-15:30
Alternatives to Cap-Weighted Indices
Lionel Martellini
Professor of Finance, EDHEC Business School
Scientific Director, EDHEC Risk Institute
lionel.martellini@edhec.edu
www.edhec-risk.com
Outline
Introduction: Beyond Cap-Weighting
In Search of Representative Indices

Cap-Weighting
Fundamental Weights
Designing Efficient Investment Benchmarks

Ad-Hoc Diversification: De-concentrating Portfolios
Scientific Diversification: Towards the Efficient Frontier
Alternative Weighting Schemes: Conditions for Optimality?
Conclusion: Concept Selection vs. Concept Diversification

3

Cap-Weighting
Fundamental Weights


4
Beyond Cap Weighting

Comparing Alternatives
A number of (index or fund) providers have recently designed

and launched non cap-weighted indices.
The (non-exhaustive) list includes:
fundamental indices
equally-weighted indices
minimum variance indices
efficient indices
equal-risk contribution (a.k.a. risk parity) indices
maximum diversification indices
This presentation provides a summary of the objectives of, and

assumptions behind, the various indexing concepts.
5
Beyond Cap Weighting

Concepts versus Figures
We will not focus so much on past performance; track records (by

definition) all look pretty good!
Instead, we propose to provide an academic perspective on the
conceptual assumptions underpinning the different methods.
(Even out-of-sample) track records are sample-dependent and thus
performance figures rely on the data and time period at hand.
For long-term benchmarks, it is important that performance is driven
by a sound concept that relies on reasonable assumptions rather than
by exploiting anomalies in past returns data.
If achieving higher risk-adjusted performance is not the focus of a
methodology, achieving it is at best a collateral benefit.
In Senecas words (circa 30 BC):
If one does not know to which port one is sailing, no wind is favorable.6
Beyond Cap-Weighting
Which Port do we want to Sail to: Indices versus Benchmarks
The words index and benchmark are often used

interchangeably; yet they define a priori very different concepts.
Market perspective: an index is a portfolio that should
represent the performance of a given segment of the market.
=> focus on representativity
Investor perspective: a benchmark is a reference portfolio that
should represent the fair reward expected in exchange for risk
exposures that an investor is willing to accept.
=> focus on efficiency
CW portfolios have long been portrayed as representative and
efficient, but have faced increased criticism on both fronts.
7

Cap-Weighting
Fundamental Weights


8

Cap-Weighting for Representativity?
A market cap weighted scheme is the obvious default option

when it comes to representing a given segment of the market.
Market cap weighted indices provide by construction a fair
representation of the stock market;
In the end, cap-weighting is nothing but an ad-hoc weighting
scheme that achieves some form of representativity.
Cap-weighted indices, however, may not provide a fair

representation of the underlying economic fundamentals.
Some have argued that they represent well the stock market but
not the economy.

Fundamental Weighting for Representativity?
Rather than using the market cap, fundamental indices use

firm attributes such as book value, dividends, sales or cash
flows as measures of size.
These indices aim at better representing the economy.
Arnott (2007): The Fundamental Index weights companies in
accordance to their footprint in the broad economy [] you wind up
with a portfolio that mirrors the economy.
Whether or not fundamentally weighted indices better

represent the economy is actually an open question, if only
because representativity is not a concept that is linked to clear
measures.
10

Cap-Weighting
Fundamental Weights


11

Efficiency is Related to Diversification
In any case, it is not clear why investors would care about their
portfolios representing the economy.
From the investors perspective, the focus should be on
efficiency: obtaining fair rewards for given risk budgets.
Efficiency is intimately related to diversification: it is by
constructing well-diversified portfolios that one can achieve a
fair reward for a given risk exposure.
CW portfolios in fact appear to be rather inefficient and poorly
diversified portfolios, and several approaches have been
developed so as to improve diversification compared to capweighting.
12

Cap-Weighting for Efficiency?
Cap-weighting is often believed to lead to risk/reward efficient

portfolios, but that belief is not really based on firm grounds.
The belief in efficiency of CW is based on a nave interpretation
of W. Sharpes Capital Asset Pricing Model (CAPM):
No need to gather any information on risk & return parameters
to find optimal portfolios ... because everybody else does!
When relaxing the highly unrealistic assumptions of the CAPM,
financial theory does not predict that the market portfolio is efficient
(Sharpe (1991), Markowitz (2005)).
If there are multiple risk factors, the mean-variance optimal portfolio
is no longer CW (Merton (1971), Cochrane (1999)); in a post-CAPM
multi-factor world, CW is just an arbitrary weighting scheme.
13

CW leads to High Concentration
Cap-weighting is particularly inefficient because it leads to high

concentration: the effective number of stocks in the index is low.
The effective number of

stocks is the reciprocal of the
Herfindhal index, a measure
of portfolio concentration.
Index
Nominal
number
Effective
number
S&P
500
94
NASDAQ
100
37
FTSE 100 (UK)
100
28
FTSE Eurobloc
300
104
FTSE Japan
500
103
Average effective number based on quarterly assessment for the time

period 01/1959 to 12/2008 for the S&P, 01/1975 to 12/2008 for the
NASDAQ, and 12/2002 to 12/2008 for the other indices .
Some index construction approaches simply avoid this

concentration; such simple de-concentration strategies do not
aim for optimality and are not grounded in portfolio theory. 14

Cap-Weighting
Fundamental Weights


15
Ad-Hoc Approach to Well-Diversified Portfolios

Equal Weighting and Equal Risk Contribution
Nave de-concentration:
Equal-weighting simply gives the same weight to each of N stocks
in the index (1/N rule).
Equal-weighting is the nave route to constructing well diversified
portfolios.
Semi-nave de-concentration:
Equal risk contribution (ERC) takes into account contribution to risk.
Contribution to risk is not proportional to dollar contribution.
Find portfolio weights such that contributions to risk are equal
(Maillard, Roncalli and Teiletche (2010)):
wi
16
p
wi
= wj
p
w j
16
Ad-Hoc Approach to Well-Diversified Portfolios

Maximum Diversification Benchmarks/Anti-Benchmark
Statistical de-concentration:
Define a diversification index and try and maximize it by utilizing the
correlations that drive the magic of diversification: The whole is
better than the sum of its parts.
Maximum Diversification (also known as anti-benchmark) aims at
generating portfolios with the highest possible diversification index
(Choueifaty and Coignard (2008)):
n
i i
DI = Max i =1
n
wi w j ij
i , j =1
The weighted average risk (in the numerator) will be high compared
to portfolio risk (in the denominator) and thus DI will be high if the
portfolio weights exploit well the correlations.
17

Cap-Weighting
Fundamental Weights


18
Scientific Approach to Well-Diversified Portfolios

Towards the Efficient Frontier
Scientific diversification is based on reaching a high risk/return
objective through portfolio construction techniques.
In practice, to get a decent proxy for efficient portfolios, one needs
to use careful risk and return parameter estimates; practical
approaches to scientific diversification make different choices
regarding the challenge of risk and return estimation.
Technology is available to generate reliable risk parameter
estimates:
Suitably designed factor models to mitigate the curse of
dimensionality (see also statistical shrinkage techniques).
Accounting for non-stationarity: e.g., GARCH and Regime Switching
models.
19
On the other hand, statistics is close to useless in terms of

expected return estimation (Merton (1980)).
19

GMV vs. MSR
Expected
Return
Maximum Sharpe
Ratio (MSR) Portfolio
Global
Minimum
Variance
(GMV)
Portfolio
Volatility
The MSR provides the highest reward per unit of portfolio volatility:
needed optimization inputs are expected returns, correlations and
volatilities.
The GMV provides the lowest possible portfolio volatility: needed
optimization inputs are correlations and volatilities.
20

Minimum Variance Benchmarks (GMV)
If you feel comfortable about estimating risk parameters the variancecovariance matrix, but not about estimating expected return
parameters, the global minimum variance (GMV) benchmark is the
way to go (e.g., Amenc and Martellini (2003)).
This approach provides a low

volatility portfolio but also a low
performance portfolio: ex-ante,
MSR+cash is better than GMV.
Ex-post, MV portfolios tend to be
concentrated portfolios with
overweighting of low volatility
stocks, with a Sharpe ratio lower
than that of EW (Garlappi et al.
(2007)).
21
18
Efficient frontier
Tangency line
16
Annualized expected return
MSR
14
12
MSR + cash
10
8
6
4
GMV
2
0
10
15
Annualized volatility
20
25
21

Efficient Indexation (MSR)
Efficient Indexation is about maximizing the Sharpe ratio.
Just like in the Minimum Variance approach, Efficient
Indexation exploits information on the covariance matrix of
stock returns; the approach uses suitably designed factor
models to mitigate the curse of dimensionality.
While direct estimation of expected returns from past returns is
useless, all hope on expected returns estimation is not lost!
Common sense suggests that expected return parameters
should be positively related to risk parameters (risk-return
tradeoff ).
Efficient Indexation uses indirect estimation of expected returns
through a stocks riskiness.
22

On the Risk-Return Relationship
Theory unambiguously confirms the existence of a positive

risk/return relationship:
Systematic risk is rewarded (APT);

Specific risk is also rewarded (Merton (1987)) (*);
Total volatility (model-free) should therefore be rewarded;
Higher moment risk is also rewarded (many references).
Use the risk-return relationship to build efficient portfolios: magic

of diversification is about mixing high-risk-and-therefore-highreturn stocks in a smart way so as to generate low risk portfolios!
23
(*) See also Barberis and Huang (2001) Malkiel and Yu (2002), Boyle, Garlappi, Uppal and Wang (2009) .

iv Puzzle VW Portfolios over Short Horizons
Value Weighted Portfolios: Short Horizon (iVol)
25.0%
Average Portfolio Return and
Standard Error Bounds
Ang, Hodrick, Xing and Zhang (2006,

2009): iv puzzle
12 Month idiosyncratic volatility
1 Month realized return
10 VW Portfolios
Value Weighted Portfolio returns
Negative Relationship
High-Low returns mainly driven by high
iVol portfolio
20.0%
15.0%
10.0%
5.0%
0.0%
0%
5%
10%
15%
20%
25%
30%
-5.0%
-10.0%
Average Risk over Cross-Section
Value Weighted Portfolios: Short Horizon (iVol)

1000.00
Value of 1$ invested in 1964
100.00
10.00
1.00
64' 67' 70' 73' 76' 79' 82' 85' 88' 91' 94' 97' 00' 03' 06' 09'
0.10
0.01
0.00
Low
High
Ten VW portfolios containing an equal number of

stocks (extracted from the CRSP data base) are built
every month after sorting the stocks based on some
risk measure, here idiosyncratic volatility w.r.t. FF
model (calculated using daily data for last 12
months); the returns of each of these portfolios are
calculated subsequent one-month periods and
averaged across the portfolio formation date.

No iv Puzzle EW Portfolios over Short Horizons

Return reversal : Huang, Liu, Rhee, and Zhang (2009)

Extreme winners and losers (over the past month)
typically have high iVol over the last 1 month
In high iVol portfolios: # past winners is almost equal
to # past losers, but average weight of past winners is
substantially larger.
Short-term return reversal effect: past-month winners
tend to under perform in subsequent month .
So, VW lowers the portfolio return compared to other
portfolios and EW does not.
Equally Weighted Portfolios: Short Horizon (iVol)
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
0%
5%
10%
15%
20%
25%
30%
-5.0%
-10.0%
Equally Weighted Portfolios: Short Horizon (iVol)
10000.00
1000.00
Negative relationship disappears when

EW used.
Extremely low return of High-Volatility
portfolio disappears.
We still do not have a positive relationship.
100.00
10.00
1.00
64' 67' 70' 73' 76' 79' 82' 85' 88' 91' 94' 97' 00' 03' 06' 09'
0.10
Low
High

What iv Puzzle ? EW Portfolios over Long Horizons
Equally Weighted Portfolios: Long Horizon (iVol)
30.0%
Positive risk-return relationship across all

portfolios.
Not only the extreme portfolios.
Intuition: long-horizon realized returns are
less susceptible to local events and hence
better proxies for expected returns.
compared to short-horizon realized returns.

25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
0%
5%
10%
15%
20%
25%
-10.0%
Equally Weighted Portfolios: Long Horizon (iVol)
10000.00
1000.00
100.00
10.00
1.00
64' 67' 70' 73' 76' 79' 82' 85' 88' 91' 94' 97' 00' 03' 06' 09'
0.10
Low
High
Ten EW portfolios containing an equal number of

risk measure, here idiosyncratic volatility w.r.t. FF
model (calculated using daily data for last 12
months); the returns of each of these portfolios are
calculated subsequent 24-months periods and
averaged across the portfolio formation date.

tv Puzzle VW Portfolios over Short Horizons
Value Weighted Portfolios: Short Horizon (tVol)
25.0%
Blitz and Vliet (2007)

12 Month total volatility
10 Portfolios
Value Weighted Portfolio returns
Negative risk-return relationship
High-Low returns mainly driven by
low tVol portfolio
20.0%
15.0%
10.0%
5.0%
0.0%
0%
5%
10%
15%
20%
25%
30%
-5.0%
-10.0%
Value Weighted Portfolios: Short Horizon (tVol)
1000.00
100.00
10.00
1.00
64' 67' 70' 73' 76' 79' 82' 85' 88' 91' 94' 97' 00' 03' 06' 09'
0.10
0.01
Low
High
Ten VW portfolios containing an equal number of

risk measure, here total volatility (calculated using
daily data for last 12 months); the returns of each of
these portfolios are calculated subsequent onemonth periods and averaged across the portfolio
formation date.

No tv Puzzle EW Portfolios over Short Horizons
Equally Weighted Portfolios: Short Horizon (tVol)
25.0%

10 Portfolios
Equally Weighted Portfolio returns
20.0%
15.0%
10.0%
5.0%
0.0%
0%
5%
10%
15%
20%
25%
30%
-5.0%
-10.0%
Equally Weighted Portfolios: Short Horizon (tVol)
1000.00
100.00
Again, Negative relationship disappears

when EW used.
Extremely low return of High-Volatility
portfolio disappears.
We still do not have a positive relationship.
10.00
1.00
64' 67' 70' 73' 76' 79' 82' 85' 88' 91' 94' 97' 00' 03' 06' 09'
0.10
Low
High

What tv Puzzle? EW Portfolios over Long Horizons
10 EW Portfolios
Positive risk-return relationship
across all portfolios.
Results are valid even tVol is
calculated using larger period.
Equally Weighted Portfolios: Long Horizon (tVol)
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
0%
5%
10%
15%
20%
25%
-10.0%
Equally Weighted Portfolios: Long Horizon (tVol)
10000.00
1000.00
100.00
10.00
1.00
64' 67' 70' 73' 76' 79' 82' 85' 88' 91' 94' 97' 00' 03' 06' 09'
0.10
Low
High
Ten EW portfolios containing an equal number of

risk measure, here total volatility (calculated using
daily data for last 12 months); the returns of each of
these portfolios are calculated subsequent 24-month
periods and averaged across the portfolio formation
date.

Downside Risk & Expected Returns
Evidence that stock downside risk is related to expected returns
Authors
Risk Measure
Moments
Zhang (2005)
Skewness
Skew
Boyer, Mitton and

Vorkink (2009)
Skewness
Skew
Tang and Shum (2003)
Skewness
Skew
Connrad, Dittmar and

Ghysels (2009)
Skewness
Skew
Ang et al. (2006)
Downside correlation
Vol, Skew, Kurt
Huang et al (2009)
Value-at-Risk (EVT)
Vol, Skew, Kurt
Bali and Cakici (2004)
Value-at-Risk
(Historical)
Vol,Skew, Kurt
Chen et al. (2009)
Semi-deviation
Vol, Skew, Kurt
Estrada (2000)
Semi-deviation
Vol, Skew, Kurt

Total Semi-Deviation EW Decile Portfolios Long Horizon
Equally Weighted Portfolios: Long Horizon (sem i-deviation)
30.0%
25.0%
12 Month Total Semi-Deviation

10 Portfolios
Equally Weighted Portfolio returns
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
0%
5%
10%
15%
-10.0%
Equally Weighted Portfolios: Long Horizon (sem i-deviation)
10000.00
Positive risk-return relationship

across all portfolios.
Results are valid even semideviation is calculated using larger
period.
1000.00
100.00
10.00
1.00
64' 67' 70' 73' 76' 79' 82' 85' 88' 91' 94' 97' 00' 03' 06' 09'
Low
High
20%

Downside Risk and Expected Returns
The average cumulative return for portfolios sorted on semi-deviation.
80%
Port Low
70%
Port 2
Port 3
60%
Port 4
Port 5
50%
Port 6
Port 7
40%
Port 8
Port 9
30%
Port High
20%
10%
0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Month after portfolio formation
Ten portfolios containing an equal number of stocks (extracted from the CRSP data base) are built every month after sorting the stocks
based on their semi-deviation (calculated using daily data for last 30 months); the cumulative returns of each of these portfolios are
calculated for various holding periods and averaged across the portfolio formation date.
32

Long-Term Results
Index
Ann.
average
return
Ann. std.
Deviation
Sharpe
Ratio
Efficient Index
11.63%
14.65%
0.41
0.52
4.65%
Cap-weighted
9.23%
15.20%
0.24
0.00
0.00%
Difference (Efficient
minus Cap-weighted)
2.40%
-0.55%
0.17
p-value for difference
0.14%
6.04%
0.04%
Information Tracking
Ratio
Error
The table shows risk and return statistics portfolios constructed with using the same set of constituents as the cap-weighted S&P 500 index.
Rebalancing is quarterly subject to an optimal control of portfolio turnover (by setting the reoptimisation threshold to 50%). Portfolios are
constructed by maximising the Sharpe ratio given an expected return estimate and a covariance estimate. The expected return estimate is
set to the median total risk of stocks in the same decile when sorting on total risk. The covariance matrix is estimated using an implicit factor
model for stock returns. Weight constraints are set so that each stock's weight is between 1/2N and 2/N, where N is the number of index
constituents. P-values for differences are computed using the paired t-test for the average, the F-test for volatility, and a Jobson-Korkie test
for the Sharpe ratio. The results are based on weekly return data from 01/1959. We use a calibration period of 2 years and rebalance the
portfolio every three months (at the beginning of January, April, July and October).
33

Cap-Weighting
Fundamental Weights


34
Conditions for Optimality

Keep it Simple But Not Too Simple
Each of the aforementioned weighting methods makes different
methodological choices.
However, portfolio theory tells us that there is only one optimal
portfolio: the tangency (MSR) portfolio.
Question: Under which conditions would the portfolio construction
choices of different index weighting schemes be truly optimal?
KIS(BNTS) principle: robustness of a method may justify simple
assumptions but is important that assumptions also remain
reasonable; if the conditions are too restrictive, we are unlikely to
obtain optimal portfolios.
35

Assumptions about Parameter Values
wMSR = f (i , i , ij )
The true tangency portfolio is a function of the

(unknown) true parameter values
Expected
Return
Optimal
Portfolio
Cap-weighted index
Volatility
Implementable proxies depend on

assumptions about parameter values
w MSR = f ( i , i , ij )
36

Indices aiming at Representativity
Cap-weighting:
One simply turns to the market, and hope that everyone else has
done a careful job at estimating risk and return parameters and
designing efficient benchmarks so we simply do not have to it
ourselves!
This would be a very nave belief in the CAPM.
Fundamental weighting:
Conditions under which this weighting scheme would be optimal
are not clear.
As an example, it would be optimal if risk parameters are
identical and expected return is proportional to the four
fundamental variables used for the weighting.
37

De-Concentration Approaches
Equal-weighting:
Optimal if and only if one assumes all stocks have the same
expected return and
the same volatility and
the same pairwise correlations!
Equal Risk Contribution (Maillard et al. (2010)):
Optimal if and only if one assumes all stocks have same
Sharpe ratios and
the same pairwise correlations.
Maximum Diversification (Choueifaty and Coignard (2008)):
Optimal if and only if one assumes all stocks have same
Sharpe ratios.
38

Efficient Frontier Approaches
Minimum Variance:
Only optimal if one assumes that all stocks have the same
expected returns, hardly a neutral/reasonable choice.
Efficient Indexation:
Optimal if one assumes that expected returns between stocks
are different, and positively related to downside risk.
39

Cap-Weighting
Fundamental Weights


40
Conclusion
Cap-weighted indices are not efficient or well-diversified

portfolios because they were never meant to be.
While alternative weighting schemes typically improve
performance, they have different objectives and more or less
strong assumptions need to be made before one can
conclude that they are truly optimal portfolios.
Investors beyond assessing performance need to
consider whether assumptions and objectives behind each
concept are compatible with their views and needs.
An outstanding question, which we do not address in this
presentation, is that of concept diversification versus concept
selection.
41
References
Amenc, N., F. Goltz, L. Martellini, and P. Retkowsky, 2010, Efficient Indexation: An Alternative to
Cap-Weighted Indices," Journal of Investment Management, forthcoming.
Bali, Turan G., and Nusret Cakici, 2004, Value at Risk and Expected Stock Returns. Financial
Analysts Journal, 60(2), 57-73.
Barberis, N., and M. Huang, 2001, Mental Accounting, Loss Aversion and Individual Stock Returns,
Journal of Finance, 56, 1247-1292.
Barberis, N. and M. Huang, Stocks as lotteries: The implications of probability weighting for
security prices, 2007, working paper.
Boyer, B., and K. Vorkink, 2007, Equilibrium Underdiversification and the Preference for Skewness,
Review of Financial Studies, 20(4), 1255-1288.
Boyer, B., T. Mitton and K. Vorkink, 2009, Expected Idiosyncratic Skewness, Review of Financial
Studies, forthcoming.
Chen, D.H., C.D. Chen, and J. Chen, 2009, Downside risk measures and equity returns in the
NYSE, Applied Economics, 41, 1055-1070.
Connrad, J., R.F. Dittmar and E. Ghysels, Ex Ante Skewness and Expected Stock Returns, 2008,
working paper.
Choueifaty, Y., and Y. Coignard, 2008, Toward Maximum Diversification, The Journal of Portfolio
Management, 35, 1, 40-51.
Cochrane, John H., 2005, Asset Pricing (Revised), Princeton University Press
Estrada, J, 2000, The Cost of Equity in Emerging Markets: A Downside Risk Approach, Emerging
Markets Quarterly, 19-30.
Grinold, Richard C. Are Benchmark Portfolios Efficient?, Journal of Portfolio Management, Fall
1992.
42
References
Haugen, R. A., and Baker N. L., The Efficient Market Inefficiency of Capitalization-weighted Stock
Portfolios, Journal of Portfolio Management, Spring 1991.
Malkiel, B., and Y. Xu, 2002, Idiosyncratic Risk and Security Returns, working Paper, University of
Texas at Dallas.
Maillard,, S., T. Roncalli and J. Teiletche, 2010, The Properties of Equally Weighted Risk
Contribution, Journal of Portfolio Management.
Markowitz, H. M., Market efficiency: A Theoretical Distinction and So What?, Financial Analysts
Journal, September/October 2005.
Merton, Robert, 1987, A Simple Model of Capital Market Equilibrium with Incomplete Information,
Journal of Finance, 42(3).
Schwartz, T., 2000, How to Beat the S&P500 with Portfolio Optimization, DePaul University,
working paper.
Sharpe, W.F., 1991 , Capital Asset Prices with and without Negative Holdings, Journal of
Finance, 46.
Tang, Y., and Shum, 2003, The relationships between unsystematic risk, skewness and stock
returns during up and down markets, International Business Review.
Tinic, S., and R. West, 1986, Risk, Return and Equilibrium: A revisit, Journal of Political Economy,
94, 1, 126-147.
Tobin, J., 1958, Liquidity Preference as Behavior Towards Risk, Review of Economic Studies, 67,
65-86.
Zhang, Y., 2005, Individual Skewness and the Cross-Section of Average Stock Returns, Yale
University, working paper.
43

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EDHEC Institutional Days

Monaco, December 8th, 2010, 14:15-15:30

Alternatives to Cap-Weighted Indices

Introduction: Beyond Cap-Weighting

In Search of Representative Indices

Designing Efficient Investment Benchmarks

Alternative Weighting Schemes: Conditions for Optimality?

Conclusion: Concept Selection vs. Concept Diversification

Introduction: Beyond Cap-Weighting

In Search of Representative Indices

Designing Efficient Investment Benchmarks

Alternative Weighting Schemes: Conditions for Optimality?

Conclusion: Concept Selection vs. Concept Diversification

Beyond Cap Weighting

A number of (index or fund) providers have recently designed

This presentation provides a summary of the objectives of, and

Beyond Cap Weighting

We will not focus so much on past performance; track records (by

The words index and benchmark are often used

Introduction: Beyond Cap-Weighting

In Search of Representative Indices

Designing Efficient Investment Benchmarks

Alternative Weighting Schemes: Conditions for Optimality?

Conclusion: Concept Selection vs. Concept Diversification

In Search of Representative Indices

A market cap weighted scheme is the obvious default option

Cap-weighted indices, however, may not provide a fair

In Search of Representative Indices

Rather than using the market cap, fundamental indices use

Whether or not fundamentally weighted indices better

Introduction: Beyond Cap-Weighting

In Search of Representative Indices

Designing Efficient Investment Benchmarks

Alternative Weighting Schemes: Conditions for Optimality?

Conclusion: Concept Selection vs. Concept Diversification

Designing Efficient Investment Benchmarks

Designing Efficient Investment Benchmarks

Cap-weighting is often believed to lead to risk/reward efficient

Designing Efficient Investment Benchmarks

Cap-weighting is particularly inefficient because it leads to high

The effective number of

FTSE 100 (UK)

Average effective number based on quarterly assessment for the time

Some index construction approaches simply avoid this

Introduction: Beyond Cap-Weighting

In Search of Representative Indices

Designing Efficient Investment Benchmarks

Alternative Weighting Schemes: Conditions for Optimality?

Conclusion: Concept Selection vs. Concept Diversification

Ad-Hoc Approach to Well-Diversified Portfolios

Ad-Hoc Approach to Well-Diversified Portfolios

Introduction: Beyond Cap-Weighting

In Search of Representative Indices

Designing Efficient Investment Benchmarks

Alternative Weighting Schemes: Conditions for Optimality?

Conclusion: Concept Selection vs. Concept Diversification

Scientific Approach to Well-Diversified Portfolios

On the other hand, statistics is close to useless in terms of

Scientific Approach to Well-Diversified Portfolios

Scientific Approach to Well-Diversified Portfolios

This approach provides a low

Scientific Approach to Well-Diversified Portfolios

Scientific Approach to Well-Diversified Portfolios