Fundamental Indexation in Europe

  • Julius Hemminki
  • Vesa Puttonen


According to the Capital Asset Pricing Model (CAPM), a capitalisation-weighted market portfolio is mean-variance optimal. From this, one could conclude that an average investor could not do better than just hold a market portfolio. Arnott et al. (2005) demonstrate that investors can do much better than capitalisation-weighted market indexes. Their paper provides evidence on fundamental equity market indexes that deliver superior mean-variance performance. The study was conducted with US companies and the returns were compared to the S&P 500 index. Arnott et al. suggest four reasons for the excess return of the fundamental index portfolios over the S&P 500; superior market portfolio construction, price inefficiency, additional exposure to distress risk, or a combination of the three1.


Cash Flow Excess Return Sharpe Ratio Capital Asset Price Model Market Portfolio 
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© The Editor(s) 2016

Authors and Affiliations

  • Julius Hemminki
    • 1
  • Vesa Puttonen
    • 2
    • 3
    • 4
  1. 1.ABBFinland
  2. 2.Helsinki School of EconomicsHelsinkiFinland
  3. 3.Helsinki School of EconomicsFinland
  4. 4.Board of Arvo Asset Management Ltd.Finland

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