Benchmark Concentration: Capitalization Weights Versus Equal Weights in the Ftse 100 Index

Multinational Finance Journal, 2009, vol. 13, no. 3/4, pp. 209-228

20 Pages Posted: 14 Jun 2005 Last revised: 14 Feb 2013

See all articles by Isaac T. Tabner

Isaac T. Tabner

University of Stirling - Accounting and Finance Division

Multiple version iconThere are 2 versions of this paper

Date Written: 2009 Sept, Dec.

Abstract

Identifying a suitable benchmark is essential when testing asset pricing models, measuring the performance of active investors, or providing market proxy portfolios for passive investors. Concern that increased domination of capitalization weighted stock indices by a few large firms will lead to inefficient portfolio diversification is leading some investors and researchers to argue that index providers should adjust their weighting methods to limit concentration. This study tests and rejects the hypothesis that concentration arising as a result of capitalization weights in the FTSE 100 Index increases risk, either during normal market conditions or during negative tail events in the return distribution. On the contrary, during the left tail of the return distribution, the equally weighted portfolio of FTSE 100 Index constituents exhibits higher risk and lower returns than the capitalization weighted FTSE 100 Index portfolio, a finding consistent with variations of the CAPM that allow for time varying risk premia.

Keywords: Index Concentration, Benchmark Indexes, Portfolio Management, Performance Evaluation, Portfolio Theory

JEL Classification: G11, G12, G14

Suggested Citation

Tabner, Isaac T., Benchmark Concentration: Capitalization Weights Versus Equal Weights in the Ftse 100 Index (2009 Sept, Dec.). Multinational Finance Journal, 2009, vol. 13, no. 3/4, pp. 209-228, Available at SSRN: https://ssrn.com/abstract=1026548 or http://dx.doi.org/10.2139/ssrn.1026548

Isaac T. Tabner (Contact Author)

University of Stirling - Accounting and Finance Division ( email )

Accounting and Finance Division
University of Stirling
Stirling FK9 4LA, Scotland
United Kingdom
44 (0) 1786 467305 (Phone)
44 (0) 1786 467308 (Fax)

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