Is an equally weighted global investment portfolio the outperformer?

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Abstract

The paper builds, in the first part, a benchmark index based on the optimal mix of indices for the global asset classes of equity, fixed-income securities, real estate, commodities, and currencies including cryptocurrencies so as to maximize the ex-post Sharpe ratio. The objective of the first part is to help investors across the globe compare portfolio performance with a uniform benchmark. In the second part, a comparison of portfolio performances is based on five methods of portfolio construction viz; 1) historical returns and variance matrix used along with Markowitz model to discover optimal weights for portfolio components, 2) modification to this approach by using autoregressive integrated moving average (ARIMA) based predicted returns in place of historical returns, 3) global minimum volatility (GMV) portfolio, 4) global market weight portfolio and 5) equal weight portfolio. The objective in the second part is to explore an easy-to-use and at the same time conceptually sound method to build portfolios for any investor worldwide even if such an investor does not have access to or does not wish to rely upon the views and opinions of investment experts. The ex-post performance of portfolios based on these five methods is compared with the ex-post performance of 207 global active and passive funds. This comparison suggests that an equal-weighted portfolio with periodical rebalancing gives the best Sharpe ratio for a global investor.

Keywords: Optimum Global Portfolio, Global Portfolio Benchmark, Equal Weight Portfolio, Periodic Rebalancing, Sharpe Ratio, ARIMA Prediction, Markowitz Optimisation, Exchange Traded Funds

Authors’ individual contribution: Conceptualization — A.D. and N.V.; Methodology — A.D. and N.V.; Software — A.D. and N.V.; Validation — A.D. and N.V.; Formal Analysis — A.D. and N.V.; Investigation — A.D. and N.V.; Resources — A.D. and N.V.; Data Curation — A.D. and N.V.; Writing — Original Draft — A.D. and N.V.; Writing — Review & Editing — A.D. and N.V.; Visualization — A.D. and N.V.; Supervision — A.D. and N.V.; Project Administration — A.D. and N.V.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G11, G12, G15, G110

Received: 18.10.2022
Accepted: 25.01.2023
Published online: 27.01.2023

How to cite this paper: Damani, A., & Vaidya, N. (2023). Is an equally weighted global investment portfolio the outperformer? Corporate Ownership & Control, 20(2), 113–126. https://doi.org/10.22495/cocv20i2art9