Do Fundamental Indexes Produce Higher Risk-Adjusted Returns than Market Cap Indexes? Evidence for European Stock Markets
Financial Markets and Portfolio Management, Vol. 24, No. 3, 2010
Posted: 2 Sep 2010
Date Written: July 16, 2010
A fundamental index weighs stocks proportionally to fundamentals such as book value, dividends, or sales. We investigate risk/return characteristics of fundamentally-weighted and market-cap-weighted indexes and employ various risk-adjustment approaches to ensure that return differences are not driven by risk. Based on stocks in the DJ Stoxx 600 index from July 1993 to April 2007, we show that fundamentally-weighted indexes achieve higher risk-adjusted returns than market-cap-weighted indexes. Our results provide empirical evidence for former theoretical findings that cap weighting may result in suboptimal risk/return characteristics.
Keywords: Fundamental weighted indexes - Risk analysis, Fama and French model, Portfolio management, Structure, Dynamic analysis, Panel data
JEL Classification: G11, G32, C23
Suggested Citation: Suggested Citation