Abstract
Fundamental indexations for common stocks refers to weighting portfolio constituents on the basis of fundamental variables. We examine the cost efficiency of this approach in the three largest European emerging markets: Poland, Russia, and Turkey. We form portfolios based net profits, sales, book values, and dividends, and evaluate their performance in the 2002-2015 period. The fundamentally weighted portfolios deliver higher risk-adjusted returns than standard capitalization-weighted portfolios, but the differences are predominantly statistically insignificant. The abnormal performance remains positive after controlling for trading costs. As a result, the study offers a cost-effective portfolio construction method that could be implemented by international investment managers with a focus on emerging markets.
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