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International Journal of Business and Management Study

Naïve and Rational Investments? The Efficiency of Equal Weighted Indices

Author(s) : GUIDO ABATE

Abstract

This study is aimed at finding an empirical evaluation of the rationality of naïve diversification when applied to indexed investments, linked to the most representative benchmarks of the US and EMU stock markets. An investor, in the MPT and CAPM frameworks, is assumed to be rational when he/she chooses the most efficient portfolio. The empirical study employs four measures of efficiency: the Gibbons, Ross and Shanken test; the Wald test, implemented through a bootstrap simulation; the Generalized Method of Moments test, implemented through a block bootstrap simulation; and Kandel and Stambaugh’s relative efficiency measure. Results provide strong evidence of the superior efficiency of equal weighting if compared to float- and capitalization- weighting. As a consequence, these findings suggest that naïve diversification can be regarded as rational behavior for indexed investors.

No fo Author(s) : 1
Page(s) : 185 - 195
Electronic ISSN : 2372-3955
Volume 3 : Issue 1
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