Fundamental Indexation

ArXiv ID: ssrn-713865 “View on arXiv”

Authors: Unknown

Abstract

A trillion-dollar industry is based on investing in or benchmarking to capitalization-weighted indexes, even though the finance literature rejects the mean-vari

Keywords: capitalization-weighted indexes, mean-variance, passive investing, benchmarking, portfolio optimization, Equities

Complexity vs Empirical Score

• Math Complexity: 2.0/10
• Empirical Rigor: 8.0/10
• Quadrant: Street Traders
• Why: The paper presents a straightforward, intuitive strategy (fundamental indexing) with minimal mathematical derivations, but heavily relies on empirical backtests, real-world benchmark comparisons, and data analysis to challenge capitalization-weighted norms.

  flowchart TD
    A["Research Goal:<br/>Test if capitalization-weighted indexes<br/>are truly optimal"] --> B["Methodology:<br/>Compare Cap-Weighted vs.<br/>Fundamental Indexation"]
    B --> C["Data: Equities &<br/>Fundamental Metrics"]
    C --> D["Computation:<br/>Mean-Variance Optimization<br/>& Portfolio Simulation"]
    D --> E["Key Finding:<br/>Fundamental Indexation<br/>Outperforms Cap-Weighting"]
    E --> F["Outcome:<br/>Rejection of passive indexing<br/>as mean-variance efficient"]