Robert D. Arnott
Research Affiliates, LLC
Jason C. Hsu
Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business
Pacific Investment Consultants, LLC
Financial Analysts Journal, Vol. 61, No. 2, pp. 83-99, March/April 2005
A trillion-dollar industry is based on investing in or benchmarking to capitalization-weighted indexes, even though the finance literature rejects the mean-variance efficiency of such indexes. This study investigates whether stock market indexes based on an array of cap-indifferent measures of company size are more mean-variance efficient than those based on market cap. These Fundamental indexes were found to deliver consistent, significant benefits relative to standard cap-weighted indexes. The true importance of the difference may have been best noted by Benjamin Graham: In the short run, the market is a voting machine, but in the long run, it is a weighing machine.
Keywords: Investment Theory, Portfolio Theory, Portfolio Management, Equity Strategies, Performance Measurement and Evaluation, Performance Measurement, Equity Investments, Fundamental Analysis and Valuation Models
Date posted: May 5, 2005
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