Considering the use of an equal-weighted index as a benchmark for South African equity investors

Abstract

We analyse and discuss the use of an equal-weighted index as an alternative to the market capitalisation weighted (cap-weighted) index as a benchmark for active equity portfolios in the South African equity market. Our findings indicate that equal-weighted portfolios are, in general, more efficient than capweighted portfolios and that random active portfolios tend to display significantly improved risk-return characteristics when using an equal-weighted index as a benchmark. We find our results are robust to transaction costs involved with rebalancing.Keywords: Benchmark; risk; capitalisation weight; equal weight; efficiency; rebalancing; costs; returns