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Do fundamental indexes produce higher risk-adjusted returns than market cap indexes? Evidence for European stock markets

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  • Olaf Stotz
  • Gabrielle Wanzenried
  • Karsten Döhnert

Abstract

A fundamental index weighs stocks proportionally to fundamentals such as book value, dividends, or sales. We investigate risk/return characteristics of fundamentally-weighted and market-cap-weighted indexes and employ various risk-adjustment approaches to ensure that return differences are not driven by risk. Based on stocks in the DJ Stoxx 600 index from July 1993 to April 2007, we show that fundamentally-weighted indexes achieve higher risk-adjusted returns than market-cap-weighted indexes. Our results provide empirical evidence for former theoretical findings that cap weighting may result in suboptimal risk/return characteristics. Copyright Swiss Society for Financial Market Research 2010

Suggested Citation

  • Olaf Stotz & Gabrielle Wanzenried & Karsten Döhnert, 2010. "Do fundamental indexes produce higher risk-adjusted returns than market cap indexes? Evidence for European stock markets," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 24(3), pages 219-243, September.
    • Handle: RePEc:kap:fmktpm:v:24:y:2010:i:3:p:219-243
    DOI: 10.1007/s11408-010-0135-9
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    References listed on IDEAS

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    Cited by:

    1. Wenguang Lin & Gary C. Sanger, 2019. "An alternative fundamental weighting scheme based on enterprise value multiple," Journal of Asset Management, Palgrave Macmillan, vol. 20(2), pages 146-156, March.
    2. Anup K. Basu & Brigette Forbes & Henk Berkman, 2014. "Does fundamental indexation lead to better risk-adjusted returns? New evidence from Australian Securities Exchange," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(3), pages 699-728, September.
    3. Walkshäusl, Christian & Lobe, Sebastian, 2010. "Fundamental indexing around the world," Review of Financial Economics, Elsevier, vol. 19(3), pages 117-127, August.
    4. Ardia, David & Boudt, Kris & Wauters, Marjan, 2016. "The economic benefits of market timing the style allocation of characteristic-based portfolios," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 38-62.

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    More about this item

    Keywords

    Fundamental weighted indexes; Risk analysis; Fama and French model; Portfolio management; Structure; Dynamic analysis; Panel data; G11; G32; C23;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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