Author
Listed:
- Diogo Carneiro Santiago
- Ricardo Pereira Câmara Leal
Abstract
This article analyzes equally-weighted stock portfolios (1/N) focusing on unsophisticated investors with small portfolios. The number of shares included in the 1/N portfolios ranged from 6 to 16 with rebalancing executed only three times a year. The period of analysis included daily and monthly returns between 1998 and 2011. The performance of the 1/N portfolios was compared to stock mutual funds, a global minimum variance portfolio with a 10% limit on positive weights (MVP 10%) and the Ibovespa index. The comparisons employed nonparametric tests, measures of risk-adjusted return and considered transaction costs. The results indicate that the performance of the selected funds is, at best, equivalent to the 1/N portfolios, albeit with a lower standard deviation. There was no significant difference in the median returns of the 1/N portfolios relative to the Ibovespa and MVP 10%. The stock selection criterion according to the ranking by the previous period Sharpe ratio is relevant, but rebalancing may be carried out less than three times a year. The 1/N portfolios are an attractive alternative to stock funds for investors with small stock portfolios even though their transaction costs may exceed 400 basis points per year.
Suggested Citation
Diogo Carneiro Santiago & Ricardo Pereira Câmara Leal, 2015.
"Equally Weighed Portfolios with Few Stocks and Small Investors,"
RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 19(5), pages 544-564.
Handle:
RePEc:abg:anprac:v:19:y:2015:i:5:1120
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