Do fundamental indexes produce higher risk-adjusted returns than market cap indexes? Evidence for European stock markets

Olaf Stotz, Gabrielle Wanzenried () and Karsten Döhnert ()

Financial Markets and Portfolio Management, 2010, vol. 24, issue 3, 219-243

Abstract: A fundamental index weighs stocks proportionally to fundamentals such as book value, dividends, or sales. We investigate risk/return characteristics of fundamentally-weighted and market-cap-weighted indexes and employ various risk-adjustment approaches to ensure that return differences are not driven by risk. Based on stocks in the DJ Stoxx 600 index from July 1993 to April 2007, we show that fundamentally-weighted indexes achieve higher risk-adjusted returns than market-cap-weighted indexes. Our results provide empirical evidence for former theoretical findings that cap weighting may result in suboptimal risk/return characteristics. Copyright Swiss Society for Financial Market Research 2010

Keywords: Fundamental weighted indexes; Risk analysis; Fama and French model; Portfolio management; Structure; Dynamic analysis; Panel data; G11; G32; C23 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:fmktpm:v:24:y:2010:i:3:p:219-243

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DOI: 10.1007/s11408-010-0135-9

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