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Equally weighted portfolios vs value weighted portfolios: Reasons for differing betas

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  • Pae, Yuntaek
  • Sabbaghi, Navid

Abstract

We prove that constituent companies’ capital structure and tax shield cause the difference in systematic risk between an equally weighted portfolio and a value weighted portfolio in an efficient market where the CAPM holds. The difference in systematic risk has positive association with component companies’ default risk.

Suggested Citation

  • Pae, Yuntaek & Sabbaghi, Navid, 2015. "Equally weighted portfolios vs value weighted portfolios: Reasons for differing betas," Journal of Financial Stability, Elsevier, vol. 18(C), pages 203-207.
    • Handle: RePEc:eee:finsta:v:18:y:2015:i:c:p:203-207
    DOI: 10.1016/j.jfs.2015.04.006
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    References listed on IDEAS

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    Cited by:

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    2. Becchetti, Leonardo & Ciciretti, Rocco & Dalò, Ambrogio, 2018. "Fishing the Corporate Social Responsibility risk factors," Journal of Financial Stability, Elsevier, vol. 37(C), pages 25-48.
    3. Aliano Mauro & Boido Claudio & Galloppo Giuseppe, 2023. "The Impact of the Financial and the Health Crisis on Listed Hotel Stocks," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 12(2), pages 1-3.
    4. Philip Ndikum, 2020. "Machine Learning Algorithms for Financial Asset Price Forecasting," Papers 2004.01504, arXiv.org.
    5. Hong Mao & Zhongkai Wen, 2020. "Optimal Decision on Dynamic Insurance Price and Investment Portfolio of an Insurer with Multi-dimensional Time-Varying Correlation," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(1), pages 29-51, March.

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    More about this item

    Keywords

    Equally weighted portfolio; Value weighted portfolio; Size effect; Noisy market hypothesis; Tax shield;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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