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Benchmark Concentration: Capitalization Weights Versus Equal Weights in the FTSE 100 Index

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  • Isaac T. Tabner

    (University of Stirling, U.K.)

Abstract

Identifying a suitable benchmark is essential when testing asset pricing models, measuring the performance of active investors, or providing market proxy portfolios for passive investors. Concern that increased domination of capitalization weighted stock indices by a few large firms will lead to inefficient portfolio diversification is leading some investors and researchers to argue that index providers should adjust their weighting methods to limit concentration. This study tests and rejects the hypothesis that concentration arising as a result of capitalization weights in the FTSE 100 Index increases risk, either during normal market conditions or during negative tail events in the return distribution. On the contrary, during the left tail of the return distribution, the equally weighted portfolio of FTSE 100 Index constituents exhibits higher risk and lower returns than the capitalization weighted FTSE 100 Index portfolio, a finding consistent with variations of the CAPM that allow for time varying risk premia.

Suggested Citation

  • Isaac T. Tabner, 2009. "Benchmark Concentration: Capitalization Weights Versus Equal Weights in the FTSE 100 Index," Multinational Finance Journal, Multinational Finance Journal, vol. 13(3-4), pages 209-228, September.
    • Handle: RePEc:mfj:journl:v:13:y:2009:i:3-4:p:209-228
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    References listed on IDEAS

    as
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    6. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Reema Monga & Deepti Aggrawal & Jagvinder Singh, 2022. "Exploring new frontiers in indexing strategies: an optimization-based risk-efficient solution," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 13(2), pages 853-865, June.
    2. Nikolaos Philippas, 2014. "Did Behavioral Mutual Funds Exploit Market Inefficiencies During or After the Financial Crisis?," Multinational Finance Journal, Multinational Finance Journal, vol. 18(1-2), pages 85-138, March - J.
    3. Stephen Matteo Miller, 2012. "Booms and Busts as Exchange Options," Multinational Finance Journal, Multinational Finance Journal, vol. 16(3-4), pages 189-223, September.
    4. Amit Pandey & Anil Kumar Sharma, 2023. "Effect of Index Concentration on Index Volatility and Performance," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(3), pages 559-585, September.

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    More about this item

    Keywords

    stock index benchmarks; incremental returns; incremental standard deviation; portfolio diversification; capitalization weights; index concentration; performance measurement;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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