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Fundamental Indexation in Europe

  • Julius Hemminki
  • Vesa Puttonen
Chapter
  • 2.1k Downloads

Abstract

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.

Keywords

Cash Flow Excess Return Sharpe Ratio Capital Asset Price Model Market Portfolio 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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References

  1. Arnott, R. D., Hsu, J. and Moore, P. (2005) ‘Fundamental Indexation’, Financial Analysts Journal, 61(2), 83–99.CrossRefGoogle Scholar
  2. Chan, L. K. C. and Lakonishok, J. (2004) ‘Value and Growth Investing: Review and Update’, Financial Analysts Journal, 60(1), 71–86.CrossRefGoogle Scholar
  3. Fama, E. F. and French, K. R. (1998) ‘Value Versus Growth: The International Evidence’, Journal of Finance, 53(6), 1975–1999.CrossRefGoogle Scholar
  4. Fama, E. F. and French, K. R. (2004) ‘The Capital Asset Pricing Model: Theory and Evidence’’, Journal of Economic Perspectives, 18(3), 25–46.CrossRefGoogle Scholar
  5. Hsu, J. C. (2006) ‘Cap-Weighted Portfolios are Sub-Optimal Portfolios’, Journal of Investment Management, 4(3), 1–10.Google Scholar
  6. Lakonishok, J., Shleifer, A. and Vishny, R. W. (1994) ‘Contrarian Investment, Extrapolation, and Risk’, Journal of Finance, 49(5), 1541–1578.CrossRefGoogle Scholar
  7. Treynor, J. (2005) ‘Why Market-Valuation-Indifferent Indexing Works’, Financial Analysts Journal, 61(5), 65–69.CrossRefGoogle Scholar

Copyright information

© 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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