Dear Forum,
or should I say dear Herb?
I have two less-than-intelligent questions, probably.
- Why don’t market-cap and price-cap weightings need rebalancing, while the equal-weighting does?
For equal-weighting, if you choose 10 stocks, they will all be weighted 10%. So, why would you need rebalancing, even when their price changes? You’ll still have 10 stocks (so, looking at the NUMBER, not the price)
- Why does equal-weighting have a bias towards small-cap?
Thanks a bunch,
C.
- Conceptually wrong. Equal weighting does not mean equal no.of stocks. It means EQUAL value. It means you put $10 in every scrip regardless of what the scrip’s price is.
This is highly unstable. As the price would vary and to maintain the equal weights the port manager has to reshuffle the no. of shares to maintain that $10. For the scrips depreciating - you would buy more and reverse for the ones having appreciated.
- You tell me if the point no. 1 is clear. Relatively speaking the m cap or price weighted have bias toward the big daddies while the equal weight is more of a communist politics who believes in everybody’s right to be in the party being equal and forever.
I may be wrong but stop relying on Schwesers.
Yes, of course it is clear now… equal VALUE, not equal number.
Yes, the Schweser example was very misleading. Now it is clear, many thanks!!