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Why do equally weighted portfolios beat value-weighted ones?

Research output: Working paper

Publication date16/11/2022
PublisherPortfolio Management Research
<mark>Original language</mark>English


The difference in performance between an equal-weighted (EW) portfolio or index and its value-weighted (VW) counterpart has been significant in the past but without a clear outperformance of one above the other. We analyze the relation between EW and VW portfolios in a Single Index model and link the differences in performance to the time-varying betas of the constituents as well as the boundaries of market concentration. We propose the difference in performance of EW minus VW portfolios as a highly informative and simultaneously very deterministic factor to proxy the development of the average constituent’s beta and hence size effects. The proposed factor has similar characteristics as the SMB factor proposed by Fama and French (1993) but incorporates full market information.