France’s Edhec-Risk Institute has published a study arguing that financial theory does not support investing in capitalisation-weighted stock indices, such as the Euro Stoxx 50 or S&P 500.
The researchers, Felix Goltz and Véronique Le Sourd, have reviewed some 17 studies conducted by other academics since the early 1970s. On the basis of this evidence, they attack the usual argument for cap-weighted indices in two ways.
Proponents of indices, the authors argue, often invoke the Capital Asset Pricing Model theory, developed by William Forsyth Sharpe in the 1960s, which argued that if an investor could hold the market portfolio – a capitalisation-weighted portfolio of all risky assets – that investment would be efficient, in other words, the best available.
But Goltz...