Equal-weighted Strategy Research Articles

Picking profitable investments: The success of equal weighting in simulated venture capitalist decision making

Using computer simulation, we investigate the impact of different strategies on the financial performance of VCs. We compare simple heuristics such as equal weighting and fast and frugal trees with more complex machine learning and regression models and analyze the impact of three factors: VC learning, the statistical properties of the investment environment, and the amount of information available in a business plan. We demonstrate that the performance of decision strategies and the relative quality of decision outcomes change critically between environments in which different statistical relationships hold between information contained in business plans and the likelihood of financial success. The Equal Weighting strategy is competitive with more complex investment decision strategies and its performance is robust across environments. Learning only from those plans that the simulated VC invested in, drastically reduces the VC's potential to learn from experience. Lastly, the results confirm that decision strategies differ in respect to the impact of added information on the outcomes of decisions. Finally, we discuss real-world implications for the practice of VCs and research on VC decision making.

Development of Indicators for Family Well-Being in Malaysia

This study was carried out to develop a set of indicators for measuring and reporting the state of family well-being in Malaysia, and subsequently, to produce an Index of Family Well-Being. To build the set of indicators, domains of family well-being and relevant indicators were identified from past studies. Focus group discussions with families, professional groups and NGOs helped to refine the indicators prior to the main study. Using a stratified random sampling design, 2,808 households were identified (a parent and a child aged at least 13 years), making a total sample of 5,616 respondents. Results indicated ten key indicators that can predict family well-being—resiliency, safety, savings, healthy lifestyle, time with family, work-family balance, importance of religion, number of bedrooms at home, debt and child care—supporting the notion of family well-being being multi-dimensional and interconnected. On the basis of the results, a model of family well-being was hypothesized. This model was used to guide the development of the Index of Family Well-being. Confirmatory factor analysis (CFA) was carried out to determine the fit of the model to data. Five domains of family well-being were identified—family relationships, economic situation, health and safety, community relationship and religion/spirituality. The Index of Family Well-Being was calculated using the equal weighting strategy to each of these five domains. This index showed that the current family well-being of Malaysians is relatively high at 7.95 (SD = 1.38) on a 0–10 Likert response format. The findings suggest that family well-being is multifaceted, made up not only of the immediate family relationships and health and safety of its members, but include having adequate income to meet the demands of a minimum standard of living. Currently, the Index that is developed is only in the form of a numerical value reflecting the state of family well-being, but in future, it can be used to track changes in the family from time to time.

Demystifying Equity Risk–Based Strategies: A Simple Alpha plus Beta Description

In this article, de Carvalho, Lu, and Moulin consider five risk-based strategies: equally weighted, equal-risk budget, equal-risk contribution, minimum variance, and maximum diversification. All five strategies can be well described by exposure to the market-cap index and to four simple factors: low beta, small cap, low residual volatility, and value. This finding, in their view, is a major contribution to the understanding of such strategies and provides a simple framework to compare them. All except the equal-weighted strategy are defensive and have lower volatility than the market-cap index. Equal-weighted is exposed to small-cap stocks. Equal-risk budget and equal-risk contribution are exposed to small-cap and to low-beta stocks. These three have a high correlation of excess returns, and their portfolios largely overlap. Their portfolios invest in all stocks available and have both a low turnover and low tracking error relative to the market-cap index. The minimum variance and maximum diversification strategies primarily have exposure to low-beta stocks. These two strategies are the most defensive, invest in much the same stocks, and have high tracking error and turnover. <b>TOPICS:</b>Volatility measures, VAR and use of alternative risk measures of trading risk, analysis of individual factors/risk premia

Memory indexing: A novel method for tracing memory processes in complex cognitive tasks.

We validate an eye-tracking method applicable for studying memory processes in complex cognitive tasks. The method is tested with a task on probabilistic inferences from memory. It provides valuable data on the time course of processing, thus clarifying previous results on heuristic probabilistic inference. Participants learned cue values of decision alternatives that were arranged within spatial frames. Later, they were told about the validities of cue dimensions and performed memory-based binary choice tasks: first, according to spontaneously adopted decision strategies and, subsequently, according to instructed decision strategies (a noncompensatory lexicographic strategy and a compensatory equal weighting strategy). During decision making, participants saw only the empty spatial frames without cue values. The spontaneously adopted and instructed decision strategies were reflected in discriminable gaze patterns on the empty spatial frames. When retrieving information no longer visible, participants tended to fixate on locations at which information was visible during the learning phase (the looking-at-nothing phenomenon). Gaze patterns were consistent with cue-wise and alternative-wise patterns of information search predicted for the instructed decision strategies as well as for the spontaneously adopted strategies identified based on decision outcomes. These findings extend previous results on the connection between memory and gaze. Furthermore, the successful application of memory indexing suggests its wider applicability in studying memory-based tasks.

Distributing weights under hierarchical clustering: A way in reducing performance breakdown

This paper proposes a clustering asset allocation scheme which provides better risk-adjusted portfolio performance than those obtained from traditional asset allocation approaches such as the equal weight strategy and the Markowitz minimum variance allocation. The clustering criterion used, which involves maximization of the in-sample Sharpe ratio (SR), is different from traditional clustering criteria reported in the literature. Two evolutionary methods, namely Differential Evolution and Genetic Algorithm, are employed to search for such an optimal clustering structure given a cluster number. To explore the clustering impact on the SR, the in-sample and the out-of-sample SR distributions of the portfolios are studied using bootstrapped data as well as simulated paths from the single index market model. It was found that the SR distributions of the portfolios under the clustering asset allocation structure have higher mean values and skewness but approximately the same standard deviation and kurtosis than those in the non-clustered case. Genetic Algorithm is suggested as a more efficient approach than Differential Evolution for the purpose of solving the clustering problem.

Real-time inflation forecast densities from ensemble Phillips curves

We examine the effectiveness of recursive-weight and equal-weight combination strategies for forecasting using many time-varying models of the relationship between inflation and the output gap. The forecast densities for inflation reflect the uncertainty across models using many statistical measures of the output gap, and allow for time-variation in the ensemble Phillips curves. Using real-time data for the US, Australia, New Zealand and Norway, we find that the recursive-weight strategy performs well, consistently giving well-calibrated forecast densities. The equal-weight strategy generates poorly-calibrated forecast densities for the US and Australian samples. There is little difference between the two strategies for our New Zealand and Norwegian data. We also find that the ensemble modelling approach performs more consistently with real-time data than with revised data in all four countries.

Real-Time Inflation Forecast Densities from Ensemble Phillips Curves

We examine the effectiveness of recursive-weight and equal-weight combination strategies for forecasting using many time-varying models of the relationship between inflation and the output gap. The forecast densities for inflation reflect the uncertainty across models using many statistical measures of the output gap, and allow for time-variation in the ensemble Phillips curves. Using real-time data for the US, Australia, New Zealand and Norway, we find that the recursive-weight strategy performs well, consistently giving well-calibrated forecast densities. The equal-weight strategy generates poorly-calibrated forecast densities for the US and Australian samples. There is little difference between the two strategies for our New Zealand and Norwegian data. We also find that the ensemble modelling approach performs more consistently with real-time data than with revised data in all four countries.

Constructing Summary Indices of Quality of Life

The authors consider how to construct summary indices (e.g., quality-of-life [QOL] indices) for a social unit that will be endorsed by a majority of its citizens. They assume that many social indicators are available to describe the social unit, but individuals disagree about the relative weights to be assigned to each social indicator. The summary index that maximizes agreement among citizens can then be derived, along with conditions under which an index will be endorsed by a majority in the social unit. The authors show that intuition greatly underestimates the extent of agreement among individuals, and it is often possible to construct a QOL index that most citizens agree with (at least in direction). In particular, they show that the equal-weighting strategy is privileged in that it minimizes disagreement among all possible individuals' weights. They demonstrate these propositions by calculating real QOL indices for two surveys of citizens' actual importance weights.

Short-term contrarian investing—is it profitable? … Yes and No

In this paper we investigate short-term contrarian investment strategies in the Australian stock market using weekly data of those stocks comprising the All Ordinaries Index during the period 1994–2001. We find both the (Rev. Financ. Stud. 3 (1990) 175) equal-weighted strategy and a new value-weighted strategy yield statistically significant short-term contrarian profits. Importantly, these observed profits could not be fully explained by measurement errors such as bid–ask bounce or by risk, seasonality or volume. Profits are largely related to firm size with overreaction to firm specific information being the primary source of short-term contrarian profits in Australia. However, when a ‘practical’ short-term contrarian strategy including reasonable transaction costs is implemented, all profits vanish. Thus, while the contrarian approach is not viable as a stand-alone strategy, we argue that it may in fact be value-enhancing when employed as an overlay strategy, particularly in the context of managed funds.