Weighting for the Right One: Weighting Scheme Design for Systematic Equity Portfolios

26 Pages Posted: 3 Feb 2022

See all articles by Wei Dai

Wei Dai

Dimensional Fund Advisors

Namiko Saito

Dimensional Fund Advisors

Gigi Wang

Dimensional Fund Advisors

Date Written: February 2, 2022

Abstract

We examine eight weighting schemes frequently used in the construction of systematic equity strategies. Through the lens of both returns- and holdings-based analysis, we highlight the importance of having a close link between security weights and market prices. Ignoring prices, as in the cases of equal weighting, rank weighting, z-score weighting, inverse volatility weighting, and fundamental weighting, can result in extreme and uncontrolled deviations relative to the market, as well as excessive turnover and costs. Furthermore, our analysis of three price-based weighting schemes identifies the integrated core approach as the most effective at targeting multiple premiums, ensuring robust risk control, reducing turnover and costs, and accounting for different investor objectives and practical considerations.

Keywords: weighting scheme, factor investing, premium integration, multi-factor portfolios, portfolio design, asset allocation

JEL Classification: G11

Suggested Citation

Dai, Wei and Saito, Namiko and Wang, Gigi, Weighting for the Right One: Weighting Scheme Design for Systematic Equity Portfolios (February 2, 2022). Available at SSRN: https://ssrn.com/abstract=4016481 or http://dx.doi.org/10.2139/ssrn.4016481

Wei Dai

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Namiko Saito (Contact Author)

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Gigi Wang

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

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