Fundamental Indexation
Fundamental Indexation ArXiv ID: ssrn-604842 “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: 4.0/10 Empirical Rigor: 8.0/10 Quadrant: Street Traders Why: The paper involves moderate mathematical finance concepts like portfolio optimization and benchmark analysis, but it is heavily data-driven, featuring extensive backtesting, real-world index performance comparisons, and discussion of implementation for a trillion-dollar industry. flowchart TD A["Research Goal<br>Test: Does capitalization weighting<br>violate mean-variance efficiency?"] --> B["Methodology<br>Constrained Optimization<br>vs. Capitalization Weighting"] B --> C["Input: Historical Returns<br>U.S. Large Cap Equities"] C --> D["Computational Process<br>Maximize Sharpe Ratio<br>Under Optimization Constraints"] D --> E{"Key Finding 1: Efficiency<br>Optimal Portfolio Sharpe Ratio<br>> Cap-Weighted Portfolio?"} E -- Yes --> F["Outcome: Cap-weighting is<br>Mean-Variance Inefficient"] E -- No --> G["Outcome: Cap-weighting is<br>Mean-Variance Efficient"] F --> H["Key Finding 2: Performance<br>Fundamental Indexation<br>Outperforms Cap-Weighting"] G --> H H --> I["Key Takeaway<br>Trillion-dollar cap-weighted industry<br>is suboptimal vs. optimized portfolios"]