Beyond Cap-Weight: The Search for Efficient Beta

Journal of Indexes, January-February 2010

25 Pages Posted: 4 Nov 2009 Last revised: 2 Nov 2010

See all articles by Robert D. Arnott

Robert D. Arnott

Research Affiliates, LLC

Vitali Kalesnik

Research Affiliates Global Advisors

Paul Moghtader

affiliation not provided to SSRN

Craig Scholl

Lazard Asset Management

Date Written: November 16, 2009


For over 40 years, our industry has relied on the Capital Asset Pricing Model (CAPM) beta and the capitalization-weighted market portfolio for asset allocation, for market representation and for our default core equity investments. This elegant world-view is now under siege from various directions. The 'fundamentalists' advocate a portfolio that weights companies in accordance with the recent economic scale of their businesses, thereby resembling the composition of the economy rather than the composition of the stock market. The 'minimum variance' crowd points to the value of consistency between investor objectives and portfolio construction. The 'egalitarians' advocate equal weighting. Historically, these alternative index strategies have delivered higher return and lower CAPM beta, which can help an investor to target either more return or less risk or a bit of both. Each of these strategies - along with the ever-dominant cap weight indexes - has strengths and weaknesses, some minor and some major.

The cap-weighted standard is also facing a more subtle source of attack as investors reassess their risk budgets. Increasingly, investors are reassessing their risk budgets, usually downward, which can create pressure to move from active into passive strategies and to lower a fund’s exposure to an undiversified single-factor equity risk. But, can we lower our risk profile without abandoning our return goals? Perhaps it is time to consider a bigger tent, allowing for the merits of multiple broad-market indexes and multiple betas.

We explore the comparative merits of four major categories of quasi-passive 'Index' construction. We do so from a global perspective. And we explore the surprising efficacy of combining multiple index strategies into a diversified beta portfolio.

Keywords: alternative indexing, beta selection

JEL Classification: G10, G12

Suggested Citation

Arnott, Robert D. and Kalesnik, Vitali and Moghtader, Paul and Scholl, Craig S., Beyond Cap-Weight: The Search for Efficient Beta (November 16, 2009). Journal of Indexes, January-February 2010, Available at SSRN:

Robert D. Arnott (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8700 (Phone)
949-325-8901 (Fax)


Vitali Kalesnik

Research Affiliates Global Advisors ( email )

16 Berkeley Street
London, W1J 8DZ
United Kingdom
+44 2039299880 (Phone)

HOME PAGE: http://

Paul Moghtader

affiliation not provided to SSRN ( email )

Craig S. Scholl

Lazard Asset Management ( email )

United States
617 289-8830 (Phone)
617 289-8888 (Fax)


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