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Simple Ways to Beat Equal-weighted Stock Portfolios

January 5, 2024 • Posted in Momentum Investing, Volatility Effects

Academic studies of stock portfolio optimization often use an equal-weighted (EW) strategy as benchmark. Are there simple EW enhancements that researchers ought to consider instead? In their December 2023 paper entitled “Outperforming Equal Weighting”, Antonello Cirulli and Patrick Walker test three sets of enhanced long-only EW portfolios relying solely on past returns:

  1. Momentum-enhanced EW – sort stocks into tenths (deciles) from lowest to highest average weekly return over the last 12 months.
  2. Volatility-enhanced EW – sort stocks into deciles from highest t0 lowest standard deviation of weekly returns over the last five years.
  3. Sharpe ratio-enhanced EW – sort stocks into deciles from lowest to highest Sharpe ratio calculated with weekly returns over the last years.

For each set, they then exclude the bottom 1, 2, 3, 4 or 5 deciles and weight stocks in retained deciles equally for a total of 15 enhanced EW portfolios. They reform all portfolios on the first Wednesday of each month. They then compare net performances of these portfolios to those of simple EW and capitalization-weighted portfolios of all stocks in the universe after debiting 0.1% frictions for turnover. They focus on large-capitalization/liquid stocks and check robustness of findings to subperiods, lookback intervals, level of frictions and rebalancing frequency. Using weekly returns in U.S. dollars, adjusted for splits and dividends, of MSCI USA, Europe, Emerging Markets and Developed Markets stocks starting five years before the test period of April 2002 through March 2022, they find that:


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