I have been an advocate of equal weighted portfolios essentially since the original study by de Miguel and others was published as a working paper in 2006.
"On the other hand, equal-weighted portfolios benefit from their higher allocation to highly profitable companies."
But why does an equal cap weighted set up mean a higher allocation to profitable companies? When the only consideration is putting the same amount of funds into all the stocks in a benchmark ?
Equal weighted indexes contain an embedded "buy low, sell high" strategy in their periodic rebalances, which contribute significantly.
Yep, it's a mean reversion strategy
Joachim you say that :
"On the other hand, equal-weighted portfolios benefit from their higher allocation to highly profitable companies."
But why does an equal cap weighted set up mean a higher allocation to profitable companies? When the only consideration is putting the same amount of funds into all the stocks in a benchmark ?
What am I missing?
If you like equal weight you'll love inverse weight (YPS)