Posted: 5 May 2005
A trillion-dollar industry is based on investing in or benchmarking to capitalization-weighted indexes, even though the finance literature rejects the mean-variance efficiency of such indexes. This study investigates whether stock market indexes based on an array of cap-indifferent measures of company size are more mean-variance efficient than those based on market cap. These Fundamental indexes were found to deliver consistent, significant benefits relative to standard cap-weighted indexes. The true importance of the difference may have been best noted by Benjamin Graham: In the short run, the market is a voting machine, but in the long run, it is a weighing machine.
Keywords: Investment Theory, Portfolio Theory, Portfolio Management, Equity Strategies, Performance Measurement and Evaluation, Performance Measurement, Equity Investments, Fundamental Analysis and Valuation Models
Suggested Citation: Suggested Citation
Arnott, Robert D. and Hsu, Jason C. and Moore, Philip, Fundamental Indexation. Financial Analysts Journal, Vol. 61, No. 2, pp. 83-99, March/April 2005. Available at SSRN: https://ssrn.com/abstract=713865