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Economic Situation & strategy
June 13, 2025
Index construction: Portfolio construction for concentrated portfolios (part 3)
Article by Dr. Christian Jasperneite
The weighting of individual stocks in concentrated portfolios presents active managers with a dilemma: equal weighting leads to liquidity problems and high tracking errors compared to market capitalization-weighted benchmarks in the case of large volumes. However, the alternative of market capitalization-based weighting can lead to significant dominance effects of individual stocks in concentrated portfolios.
Our analysis examines an alternative approach: weighting based on the root of market capitalization. Using 1,000 simulated portfolios from the STOXX 600 Europe for the period 2015-2025, we compare the effects of different weighting methods on the risk-return profiles.
How much do the risk-return distributions actually differ? Which method leads to the most stable Sharpe ratios? And where is the optimal “sweet spot” between liquidity aspects and concentration risks? Find out in the current issue of “Economic Situation & Strategy”!