The authors compare capitalization weighting with economic scale, equal weight, and minimum variance approaches to rethink what passive exposure can look like. Across 1993 through June 2009, several alternatives produced higher returns or lower volatility, suggesting diversified beta sources may matter alongside manager selection.
Beyond Cap-Weight: The Search for Efficient Beta
Vitali Kalesnik, Rob Arnott
Research
25 Pages
Key Takeaways
Economic Scale Advantage: Economic Scale returned 9.46% annually versus 6.39% for Cap Weight, with slightly lower volatility of 14.35% versus 14.50%.
Minimum Variance Efficiency: Minimum Variance returned 9.26% with 10.70% volatility and a 0.52 Sharpe ratio, compared with 0.18 for Cap Weight.
Diversified Beta Results: Efficient Beta returned 8.43% with 12.81% volatility, while combining all four strategies produced an 8.45% return with 13.18% volatility.
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