Industry-Based Alternative Equity Indices (Podcast)
Market capitalization is quite well established as the standard for index weighting, but new research suggests that industry-based weighting schemes have several advantages over traditional market-cap weighting. Jean-François L’Her, CFA, and his coauthors Frank Leclerc, CFA, Tammam Mouakhar, CFA, and Patrick Savaria, CFA, published their research on the topic in the March/April 2013 issue of the Financial Analysts Journal. Their article, “Industry-Based Alternative Equity Indices,” outlines the benefits of industry-weighted indices.
I recently talked with L’Her about his research as a part of our FAJ author interview series. He says that he and his coauthors tried to create alternative equity indices based on three criteria: scalability, low complexity, and low cost. They found that using industries as building blocks for portfolios “simplifies portfolio construction” by avoiding the curse of dimensionality and the error maximization problem.
To hear L’Her discuss the benefits of an industry-weighted portfolio, listen to the full interview above or download the MP3.
CFA Institute members can access the full article on the CFA Publications website.
Disclaimer: Please note that the views presented in this interview do not necessarily represent those of Canada Pension Plan Investment Board (CPPIB) or Caisse de Dépôt et Placement du Québec (Caisse).
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.