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Equal-weighted strategy: Why it outperforms value-weighted strategies? Theory and evidence


Recent academic papers and practitioner publications suggest that equal-weighted portfolios (or 1/N portfolios) appear to outperform various other portfolio strategies. In addition, as the equal-weighted portfolio does not rely on expected average returns, it is therefore assumed to be more robust compared to other price-weighted or value-weighted strategies. In this paper, we provide a theoretical framework to the equal-weighed versus value-weighted equity portfolio model, and demonstrate using simulation as well as real-world data from 1926 to 2014 that an equal-weighted strategy indeed outperforms value-weighted strategies. Moreover, we demonstrate that a significant portion of the excess return is attributable to portfolio rebalancing. Finally, we show that because of equal-weighting, the excess returns are higher than the higher costs incurred due to higher portfolio turnover. Therefore, even after accounting for higher portfolio turnover costs, equal-weighting makes economic sense.

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Correspondence to Rama Malladi.

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Malladi, R., Fabozzi, F.J. Equal-weighted strategy: Why it outperforms value-weighted strategies? Theory and evidence. J Asset Manag 18, 188–208 (2017).

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  • equal-weighted
  • cap-weighted
  • 1/N
  • asset allocation
  • portfolio optimization

JEL Classification

  • G11