Abstract
This chapter demonstrates how to calculate portfolio returns. We also show how to construct equal-weighted and value-weighted portfolios.
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Notes
- 1.
There is no consensus in the literature as to whether a small cap premium still exists. There is literature that shows the small stock premium disappeared after it was discovered several decades ago, while there is literature that supports the use of a small stock premium even through the present.
- 2.
S&P 500 Equal Weight Index Methodology, April 2012, retrieved from http://us.spindices.com/documents/methodologies/methodology-sp-500-equal-weight-index.pdf on January 3, 2013 and MSCI Equal Weight Indices Methodology, May 2011 retrieved from http://www.msci.com/eqb/methodology/meth_docs/MSCI_Equal_Weighted_Indices_Methodology_May11.pdf on January 3, 2014.
- 3.
An alternative to using market capitalization weights is to use the free-float adjusted market capitalization as weights. For example, MSCI announced on December 10, 2000 that it was going to adjust all its equity indices for free float. MSCI defines free float as “total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions.” Source: MSCI Press Release, “MSCI to Adjust for Free Float and to Increase Coverage to 85 %” December 10, 2000 retrieved from http://www.msci.com/eqb/pressreleases/archive/20001210_pr01.pdf on January 3, 2014.
- 4.
References
Maginn, J., Tuttle, D., Pinto, J., & McLeavey, D. (2007). Managing investment portfolios: A dynamic process (3rd ed.). New Jersey: Wiley.
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Ang, C. (2015). Portfolio Returns. In: Analyzing Financial Data and Implementing Financial Models Using R. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-14075-9_3
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DOI: https://doi.org/10.1007/978-3-319-14075-9_3
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