Practical Applications of The Stable ROE Portfolio: An Alternative Equity Index Strategy Based on Common Sense Security Analysis

Abstract

Alternative index strategies have become widely adopted as “smart beta” or “alternative beta” solutions to market cap-weighted indices. Investors can now select from a range of solutions that are rules based (such as equal weighting or fundamental indexing) or optimization based (such as minimum variance or maximum diversification). Here’s a new method that combines the minimum variance approach and a stock’s return on equity (ROE). In this report, the authors highlight key findings from their article in the 40th Anniversary Issue of The Journal of Portfolio Management. They show us how to construct a stable ROE portfolio (SRP) with minimum ROE variation over time and demonstrate that it clearly outperforms other alternative equity strategies.