Rafi Replication: Easier Done than Said?
Journal of Asset Management Vol. 13, 3, 210-225
23 Pages Posted: 5 Apr 2013
Date Written: March 13, 2012
We investigate whether adding fundamental indices to a portfolio provides increased diversification benefits. Our results show that equity investors who care only about portfolio mean and variance will benefit from including a fundamental index in their portfolios. This benefit is especially pronounced during periods of average stock market volatility. We also find that investors can construct a do-it-yourself buy-and-hold replicating portfolio that frequently outperforms the RAFI ETF out-of-sample.
Keywords: Fundamental indexes, portfolio diversification, mean-variance spanning
JEL Classification: G11, G12
Suggested Citation: Suggested Citation