The Effects of Equal Weighting and Rebalancing on Portfolio Performance

Abstract: This study compares the performance of equal- and value-weighted portfolios using a broad investment universe consisting of the stocks from the Swedish stock market. While implementing random sampling in the portfolio construction procedure, three rebalancing schemes are applied on the equally weighted portfolio in order to observe differences in performance among these. In order to compare how much of the total mean return can be attributed to the systematic components and how much stems from the various rebalancing schemes the Fama and French (1993) and Carhart (1997) four-factor model is used. The empirical results show that all three equal-weight portfolios with various rebalancing frequencies outperform the value weighted benchmark, both before and after transaction costs. The alphas are highly significant, positive in absolute terms and substantial in relative terms. Within the equally weighted, tough differences are relatively minor, the weekly rebalancing scheme outperforms before transaction costs and the quarterly after taking these into consideration.