Do Fundamental Indexes Produce Higher Risk-Adjusted Returns than Market Cap Indexes? Evidence for European Stock Markets

Financial Markets and Portfolio Management, Vol. 24, No. 3, 2010

Posted: 2 Sep 2010

See all articles by Olaf Stotz

Olaf Stotz

Frankfurt School of Finance and Management

Gabrielle Wanzenried

Institut für Finanzdienstleistungen Zug (IFZ)

Karsten Doehnert

affiliation not provided to SSRN

Date Written: July 16, 2010

Abstract

A fundamental index weighs stocks proportionally to fundamentals such as book value, dividends, or sales. We investigate risk/return characteristics of fundamentally-weighted and market-cap-weighted indexes and employ various risk-adjustment approaches to ensure that return differences are not driven by risk. Based on stocks in the DJ Stoxx 600 index from July 1993 to April 2007, we show that fundamentally-weighted indexes achieve higher risk-adjusted returns than market-cap-weighted indexes. Our results provide empirical evidence for former theoretical findings that cap weighting may result in suboptimal risk/return characteristics.

Keywords: Fundamental weighted indexes - Risk analysis, Fama and French model, Portfolio management, Structure, Dynamic analysis, Panel data

JEL Classification: G11, G32, C23

Suggested Citation

Stotz, Olaf and Wanzenried, Gabrielle and Doehnert, Karsten, Do Fundamental Indexes Produce Higher Risk-Adjusted Returns than Market Cap Indexes? Evidence for European Stock Markets (July 16, 2010). Financial Markets and Portfolio Management, Vol. 24, No. 3, 2010. Available at SSRN: https://ssrn.com/abstract=1669914

Olaf Stotz (Contact Author)

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Gabrielle Wanzenried

Institut für Finanzdienstleistungen Zug (IFZ) ( email )

Zug, CH-6304
Switzerland

Karsten Doehnert

affiliation not provided to SSRN ( email )

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