SPIVA Award to paper on equal weighted portfolios
Raman Uppal,Grigory Vilkov and Yuliya Plyakha have claimed first prize at the SPIVA Awards for the paper “Why Does an Equal-Weighted Portfolio Outperform Value- and Price-Weighted Portfolios?”
Raman Uppal is a member of the EDHEC-Risk Institute and Professor of Finance at EDHEC Business School, while co-authors Grigory Vilkov and Yuliya Plyakha are at Goethe University in Frankfurt.
The SPIVA Awards were launched by S&P Indices as an international programme that recognises excellence in research on the topic of index-related applications. The first prize is awarded for distinctive, high-quality research in the use of financial market indices for investment analysis and management.
The laureates were selected by a jury of academics and industry experts consisting of David Blitzer, managing director and chairman of the S&P Index Committee; Antii Petajisto, visiting assistant professor of Finance at New York University Stern School of Business; Robert Whaley, professor of Management and co-director of the Financial Markets Research Center at Vanderbilt University; Srikant Dash, managing director at S&P Indices; Vijay Singal, J. Gray Ferguson chair professor of Finance at the Pamplin College of Business, Virginia Tech; and Harold Evensky, president of Evensky & Katz and former chair of the TIAA-CREF Institute Advisory Board.
The winning study compares the performance of equal-, value-, and price-weighted portfolios of stocks in the major US equity indices over the last four decades.
It finds the equal-weighted portfolio with monthly rebalancing outperforms the value- and price-weighted portfolios in terms of total mean return, four factor alpha, Sharpe ratio, and certainty-equivalent return, even though the equal-weighted portfolio has greater portfolio risk.
The total return of the equal-weighted portfolio exceeds that of the value- and price-weighted because the equal-weighted portfolio has both a higher return for bearing systematic risk and a higher alpha when using the four-factor model.
In the introduction to the paper the authors said their aim was to understand the reasons for differences in performance across these weighting rules.
Their work was motivated by the finding in DeMiguel, Garlappi, and Uppal (2009) that the out-of-sample performance of an equal-weighted portfolio of stocks is significantly better than that of a value-weighted portfolio, and no worse than that of portfolios from a number of optimal portfolio selection models. Jacobs, Muller, and Weber (2010) extend this finding to other datasets and asset classes.
The authors point out it is important to understand the difference in performance of the equal- and value-weighted portfolios because of the central role the value-weighted market portfolio plays in asset pricing and also as a benchmark against which portfolio managers are evaluated.
Their research results imply that the source of the superior performance of the equal weighted portfolio is its significantly higher mean return, along with its less-negatively skewed returns.