3 ms·

>Equal weighted funds are more risky (volatile), but have higher historic returns than market cap weighted funds. But do they outperform after risk adjustment?

>Equal weighted funds are more risky (volatile), but have higher historic returns than market cap weighted funds. But do they outperform after risk adjustment? I doubt it and if not you're better off just leveraging a bit to your desired level of risk. The point of passive investing isn't that the trading strategy can be automated, the point is to say "I want to grab exactly the average return of the market every year". Trying to do anything else is by definition not achievable by everyone so why do people think they should be the lucky ones? What specific advantage does a retail investor bring to merit that?

perl4ever 9y ago
I don't think it makes sense to equate risk with volatility. Say I have $1M. If I buy a cap weighted S&P 500 fund, I have about $40,000 in Apple, because it's about 4%. If I then switch to an equal weighted S&P 500, that $40K will be split up between 20 stocks with about $2K each. That is clearly more diversified with respect to company specific risk. It may or may not be worth it given increased fees, but you can't just dogmatically say it's equivalent to cap-weighted plus leverage. It's qualitatively different.
- ataturk 9y ago
  The S&P fund or any index that spreads out your risk is pretty much always your best bet. If you hold a single stock, say AAPL, and that one stock slides for any reason, you don't have enough years to make it all back. We regular folk who do not buy options as insurance can only spread out our risk as widely as possible. Institutions and firms with billions of dollars can do fancy things to protect themselves.
- pedrocr 9y ago
  >you can't just dogmatically say it's equivalent to cap-weighted plus leverage I'm saying it's strictly better to do cap-weighted plus leverage. That's what financial theory tells us anyway, that the best portfolio is whatever mix between risk free cash and the same mix as all the assets in the world. Deviating from that brings you farther away from the efficiency frontier. Now for this to hold EMH must hold and we know it's not true in the stronger forms which was why I was asking for a risk adjusted benchmark.
  - perl4ever 9y ago
    I don't think there's a theory that tells you risk is volatility. Isn't that more of an axiom? And I have the distinct impression it was chosen because it leads to tractable math. I'm not endorsing a specific alternative definition of risk, but I was suggesting risk is clearly multidimensional and intimately related to predicting what will be correlated in the future.

perl4ever 9y ago

I don't think it makes sense to equate risk with volatility. Say I have $1M. If I buy a cap weighted S&P 500 fund, I have about $40,000 in Apple, because it's about 4%. If I then switch to an equal weighted S&P 500, that $40K will be split up between 20 stocks with about $2K each. That is clearly more diversified with respect to company specific risk. It may or may not be worth it given increased fees, but you can't just dogmatically say it's equivalent to cap-weighted plus leverage. It's qualitatively different.

ataturk 9y ago
The S&P fund or any index that spreads out your risk is pretty much always your best bet. If you hold a single stock, say AAPL, and that one stock slides for any reason, you don't have enough years to make it all back. We regular folk who do not buy options as insurance can only spread out our risk as widely as possible. Institutions and firms with billions of dollars can do fancy things to protect themselves.
pedrocr 9y ago
>you can't just dogmatically say it's equivalent to cap-weighted plus leverage I'm saying it's strictly better to do cap-weighted plus leverage. That's what financial theory tells us anyway, that the best portfolio is whatever mix between risk free cash and the same mix as all the assets in the world. Deviating from that brings you farther away from the efficiency frontier. Now for this to hold EMH must hold and we know it's not true in the stronger forms which was why I was asking for a risk adjusted benchmark.
- perl4ever 9y ago
  I don't think there's a theory that tells you risk is volatility. Isn't that more of an axiom? And I have the distinct impression it was chosen because it leads to tractable math. I'm not endorsing a specific alternative definition of risk, but I was suggesting risk is clearly multidimensional and intimately related to predicting what will be correlated in the future.