Bridge over ocean
1 March 2005 Financial Analysts Journal Volume 61, Issue 2

Fundamental Indexation

  1. Robert D. Arnott
  2. Jason Hsu
  3. Philip Moore

A trillion-dollar industry is based on investing in or benchmarking to capitalization-weighted indexes, even though the finance literature rejects the mean–variance efficiency of such indexes. This study investigates whether stock market indexes based on an array of cap-indifferent measures of company size are more mean–variance efficient than those based on market cap. These “Fundamental” indexes were found to deliver consistent, significant benefits relative to standard cap-weighted indexes. The true importance of the difference may have been best noted by Benjamin Graham: In the short run, the market is a voting machine, but in the long run, it is a weighing machine.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We're using cookies, but you can turn them off in Privacy Settings. Otherwise, you are agreeing to our use of cookies. Learn more in our Privacy Policy.