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Abstract
Alternative equity index strategies are a variation of passive indexing, where the “index” is based on initial active decisions as to how to create the universe of stocks, the stocks’ weights, and the rebalance procedure, and then passively follow these procedures forward through time. The authors of this article replicate prior research that shows popular alternative indexes, such as fundamental indexing and minimum volatility, have higher returns and Sharpe ratios than the S&P 500. They present a new alternative index that creates a portfolio with the lowest predicted volatility of return on equity (ROE), the “stable ROE portfolio.” The stable ROE portfolio delivers higher and more stable earnings, and higher returns and Sharpe ratios than other alternative indexes or the S&P 500.
TOPICS: Passive strategies, equity portfolio management, in portfolio management
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