Investigating the performance of fundamentally-weighted portfolios
Abstract: Market indices based on market capitalization have been argued to be the most mean-variance efficient for a long time. In recent years, this argument has been questioned and other methods of weighting portfolios have been suggested. One of these is the weighting by fundamental indexation. This thesis investigates whether fundamentally-weighted portfolios outperform portfolios weighted by market capitalization. For this purpose, four different fundamentally-weighted portfolios are constructed and compared to a composite portfolio, an equally weighted portfolio and a portfolio based on market capitalization. These portfolios consist of the 100 largest stocks from the Swedish stock market and their performance is studied over a period of eight years. The results show that the Equal Weight portfolio outperforms the fundamentally-weighted portfolios and the Market Capitalization portfolio. Thereafter, the Sharpe ratio is compared to different performance measures to see if they suggest a different ranking of the portfolios. Moreover, the Atkinson index, which is originally a measure of income inequality, is introduced. The Atkinson index serves as a measure of financial risk and is in turn also converted into a performance measure. Despite that it was possible to show that the portfolio returns do not follow a normal distribution, the comparisons of the different performance measures did not lead to any substantial difference in the ranking of the portfolios.
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