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Equal-weighting and value-weighting: which one is better?

Author

Listed:
  • Nan Qin

    (Northern Illinois University)

  • Vijay Singal

    (Pamplin College of Business, Virginia Tech)

Abstract

Prior research shows that noisy prices can introduce biases in returns causing equal-weighted portfolios to outperform value-weighted portfolios. In this paper, we reevaluate the superiority of EW portfolios in the presence of market frictions. We find that trading costs have limited impact on the performance of EW portfolios, while taxes cause the performance of both EW and VW portfolios to deteriorate by a similar magnitude leaving the superiority of EW portfolios intact. Besides mispricing, the results for small cap portfolios may also be affected by the size effect. Overall, EW portfolios earn annualized risk-adjusted returns between 1.23% and 1.79% even after accounting for trading costs and taxes.

Suggested Citation

  • Nan Qin & Vijay Singal, 2022. "Equal-weighting and value-weighting: which one is better?," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 743-768, February.
    • Handle: RePEc:kap:rqfnac:v:58:y:2022:i:2:d:10.1007_s11156-021-01008-w
    DOI: 10.1007/s11156-021-01008-w
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    References listed on IDEAS

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    More about this item

    Keywords

    Indexing; Equally-weighted index; Stock return bias; Jensen’s inequality; Capital gains tax;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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