Portfolio Construction - Equal Weights

Overview

The equal weighted portfolio takes a set of assets, allocates equal dollar amounts to each asset in the set. The manner in which the initial set of assets is chosen depends on the portfolio strategy and the information on hand.

If a portfolio manager has a set of forecasts, then the initial set of assets can be chosen to be the assets with the highest forecasts. (say, the top 50, for example)

Wit

Re-Balancing

After an equally weighted portfolio has been constructed, the dollar weights of each asset will change with time, making it no longer equally weighted. This means that the portfolio manager will have to implement a process by which the portfolio is re-balanced back to equal weights.

Small Cap Tilt

As a practical matter, equal weighted portfolio will come with a small cap tilt. That is, each asset is given the same sizing in the portfolio, both the large cap companies and the small cap will have the same dollars invested. Compared to a market cap based index, the equal weighted portfolio will be weighted towards the small cap stocks.