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The Effects of Equal Weighting and Rebalancing on Portfolio Performance

Stefanovska, Magdalena LU (2020) NEKH01 20201
Department of Economics
Abstract
This study compares the performance of equal- and value-weighted portfolios using a broad investment universe consisting of the stocks from the Swedish stock market. While implementing random sampling in the portfolio construction procedure, three rebalancing schemes are applied on the equally weighted portfolio in order to observe differences in performance among these. In order to compare how much of the total mean return can be attributed to the systematic components and how much stems from the various rebalancing schemes the Fama and French (1993) and Carhart (1997) four-factor model is used. The empirical results show that all three equal-weight portfolios with various rebalancing frequencies outperform the value weighted benchmark,... (More)
This study compares the performance of equal- and value-weighted portfolios using a broad investment universe consisting of the stocks from the Swedish stock market. While implementing random sampling in the portfolio construction procedure, three rebalancing schemes are applied on the equally weighted portfolio in order to observe differences in performance among these. In order to compare how much of the total mean return can be attributed to the systematic components and how much stems from the various rebalancing schemes the Fama and French (1993) and Carhart (1997) four-factor model is used. The empirical results show that all three equal-weight portfolios with various rebalancing frequencies outperform the value weighted benchmark, both before and after transaction costs. The alphas are highly significant, positive in absolute terms and substantial in relative terms. Within the equally weighted, tough differences are relatively minor, the weekly rebalancing scheme outperforms before transaction costs and the quarterly after taking these into consideration. (Less)
Please use this url to cite or link to this publication:
author
Stefanovska, Magdalena LU
supervisor
organization
course
NEKH01 20201
year
type
M2 - Bachelor Degree
subject
keywords
Equal weighting, rebalancing, Swedish stock market, equity portfolio, contrarian, idiosyncratic risk, four-factor model
language
English
id
9029100
date added to LUP
2021-01-19 15:22:29
date last changed
2021-01-19 15:22:29
@misc{9029100,
  abstract     = {{This study compares the performance of equal- and value-weighted portfolios using a broad investment universe consisting of the stocks from the Swedish stock market. While implementing random sampling in the portfolio construction procedure, three rebalancing schemes are applied on the equally weighted portfolio in order to observe differences in performance among these. In order to compare how much of the total mean return can be attributed to the systematic components and how much stems from the various rebalancing schemes the Fama and French (1993) and Carhart (1997) four-factor model is used. The empirical results show that all three equal-weight portfolios with various rebalancing frequencies outperform the value weighted benchmark, both before and after transaction costs. The alphas are highly significant, positive in absolute terms and substantial in relative terms. Within the equally weighted, tough differences are relatively minor, the weekly rebalancing scheme outperforms before transaction costs and the quarterly after taking these into consideration.}},
  author       = {{Stefanovska, Magdalena}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{The Effects of Equal Weighting and Rebalancing on Portfolio Performance}},
  year         = {{2020}},
}