Categorical Evaluation of Alternative Index Weighting Schemes
45 Pages Posted: 3 Dec 2014
Date Written: November 24, 2014
The direction of this study is not to derive a conclusion on the superiority of single strategies from a pure risk-return perspective, but rather provide a guideline on a more accurate and representative categorisation on index weighting schemes. We start of by defining three categories of index construction methods and, thereon, allocate 16 alternative index weighting schemes. Empirical evidence confirms commonalities amongst peers in terms of the distributions of returns, portfolio concentration, a range of risk metrics and a return attribution analysis according to traditional and newly introduced industry-based risk factors. Furthermore, we consider static and dynamic norm constraints to shift sampling approaches closer to the pre-defined benchmark, whilst determining the impact of a substitution from the classical value-weight point of reference to an equally-weighted benchmark portfolio.
Keywords: enhanced indexing, full replication, sampling, risk factor decomposition, benchmark choice, norm constraints
JEL Classification: G11
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