The Impact of Index Design on Asset Management

Enrica Bolognesi ()
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Enrica Bolognesi: University of Udine

Chapter Chapter 2 in New Trends in Asset Management, 2023, pp 7-22 from Springer

Abstract: Abstract This chapter focuses on the impact of different equity index construction methodologies on the risk-return profile of managed portfolios. The first step is to define the characteristics that a market index must show to be used as benchmark in the asset management industry. Secondly, we critically analyse the main threats originated by using an equity market index composed according to the market cap of its components. The analysis of the impact of this methodology is extremely important because of their widespread use by institutional investors. In particular, the focus is on the distortions in their composition generated by overvalued securities (which can fuel financial bubbles) and on the risk of low diversification. Moreover, we provide evidence of the differences between alternative index construction methodologies, such as methodologies based on market representativity and on portfolio efficiency.

Keywords: Benchmark; CAPM; Market portfolio; Index design; Cap-weighting (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-35057-3_2

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DOI: 10.1007/978-3-031-35057-3_2

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