In Defence of Capitalisation Weights: Evidence from the FTSE 100 and S&P 500 Indices

20 Pages Posted: 31 Dec 2011

See all articles by Isaac T. Tabner

Isaac T. Tabner

University of Stirling - Accounting and Finance Division

Date Written: January 2012

Abstract

A simple method for decomposing the variance covariance matrix of portfolio returns at the level of individual stocks is applied to the FTSE 100 Index. During extreme negative shocks, the largest index constituents exhibit lower than average covariance, thereby reducing the volatility of the capitalisation‐weighted index. The risk‐adjusted returns of the capitalisation‐weighted FTSE 100 Index exceed those of an equally‐weighted version of the same index and the outperformance is robust to the method of risk adjustment applied. The equally‐weighted index also exhibits greater systematic (market) risk than the capitalisation‐weighted version.

Keywords: FTSE 100 Index, S&P 500 Index, benchmark portfolios, capitalisation weights, stock indices, portfolio diversification, performance measurement

JEL Classification: G10, G11, G12, G14, G15, C63, L11

Suggested Citation

Tabner, Isaac T., In Defence of Capitalisation Weights: Evidence from the FTSE 100 and S&P 500 Indices (January 2012). European Financial Management, Vol. 18, Issue 1, pp. 142-161, 2012. Available at SSRN: https://ssrn.com/abstract=1977735 or http://dx.doi.org/10.1111/j.1468-036X.2009.00519.x

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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