Portfolio Weighting Methods: Naïve vs. Scientific Diversification

20 Pages Posted: 25 Oct 2019

Date Written: October 16, 2017

Abstract

In our study we found that picking the right weighting method at times doubles portfolio returns. But, paradoxically, we found no significant differences between returns achieved through naïve and scientific weighting methods. Nevertheless, we dismissed the hypothesis that portfolio weightings are irrelevant, since we found a set of variables explaining their relative performance. Our conclusion is that passive investors will gain from sticking to weighting methods based on the marginal efficiency of equity or capitalization rather than the widely advocated mean-variance method. However, active investors can gain from portfolio re-balancing based on one or multiple weighting methods.

Keywords: portfolio diversification, weighting methods, performance attribution, active and passive investing

JEL Classification: G11, G00, M40

Suggested Citation

Mendes, António Marques and Santos, Dinis, Portfolio Weighting Methods: Naïve vs. Scientific Diversification (October 16, 2017). Available at SSRN: https://ssrn.com/abstract=3470582 or http://dx.doi.org/10.2139/ssrn.3470582

António Marques Mendes (Contact Author)

Universidade de Coimbra ( email )

Av. Dias da Silva, 165
Coimbra, 3004-512
Portugal
+351-239790500 (Phone)

HOME PAGE: http://www.uc.pt/en/feuc

Dinis Santos

Faculdade de Economia ( email )

Av. Dias da Silva, 165
Coimbra, 3004-512
Portugal

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