Portfolio Return Metric: Equal Weights Versus Value Weights

22 Pages Posted: 16 Jul 2002

See all articles by Kevin C.H. Chiang

Kevin C.H. Chiang

University of Alaska Fairbanks - School of Management (SOM); Louisiana State University, Baton Rouge - Department of Finance

Date Written: May 22, 2002

Abstract

Whereas the existing literature focuses on the relation between weighting schemes and abnormal portfolio return metrics, this study extends the literature and investigates the relation between weighting schemes and raw portfolio return metrics. We show that the equal-weight portfolio return metric systematically yields higher estimates of portfolio returns for event samples than the value-weight portfolio return metric. We also demonstrate that value-weight portfolio return metric can be a biased estimator of the counterpart of the population. These results imply that the commonly used testing procedure based on the matching portfolio method and the Fama-French three factor regression can produce misleading inferences. Several remedies are proposed in this study.

Keywords: event study, market efficiency

Suggested Citation

Chiang, Kevin C.H., Portfolio Return Metric: Equal Weights Versus Value Weights (May 22, 2002). Available at SSRN: https://ssrn.com/abstract=313428 or http://dx.doi.org/10.2139/ssrn.313428

Kevin C.H. Chiang (Contact Author)

University of Alaska Fairbanks - School of Management (SOM) ( email )

P.O. Box 756080
208C Bunnell Building
Fairbanks, AK 99775-0500
United States
907-474-7049 (Phone)
907-474-5219 (Fax)

Louisiana State University, Baton Rouge - Department of Finance ( email )

E.J. Ourso College of Business Administration
Baton Rouge, LA 70803
United States
225-753-4978 (Phone)
225-388-6366 (Fax)

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