Practically Beating a Market-weighted Stock Index?
January 13, 2014 - Equity Premium, Strategic Allocation
Is there a simple compromise between easy-to-implement market weights and more diversified equal sector and equal stock weights? In their December 2013 paper entitled “A Simple Diversified Portfolio Strategy”, Bernd Hanke and Garrett Quigley present a stock portfolio construction approach that blends market weights, equal stock weights and equal sector weights. The objectives of the approach (relative to market weights) are: (1) higher returns (by capturing more of the diversification premium); (2) lower risk (via increased diversification); and, (3) competitive capacity and rebalancing frictions (by limiting the tilt toward small, illiquid stocks). In testing this approach, they form and rebalance annually regional (U.S., European and Japanese) portfolios of relatively liquid stocks. They ignore rebalancing frictions. They define sectors via the broadest Global Industry Classification Standard level (ten sectors). Using total (dividend-reinvested) returns, market capitalizations and sector memberships for a broad sample of relatively liquid stocks during January 1992 through March 2013, they find that: Keep Reading