Constructing Value-Weighted Industry Returns from Stock Data

Summary

The note explains a procedure for building annual industry portfolios from individual stock returns. Stocks are assigned to industries by their four-digit SIC classifications, using NYSE, AMEX, and NASDAQ listings. The industry assignment is made at the end of June, and portfolio membership is then used to calculate monthly returns over the following July-to-June period.

Each industry's monthly return is calculated as a value-weighted average of its constituent stock returns, with market value based on shares outstanding multiplied by share price. The cited Fama and French paper is offered as a methodological reference. The discussion describes the US exchange and classification setup; adapting it to another market, such as China, would require suitable industry classifications and market value data. It does not provide implementation code or evaluate how alternative classification schemes affect the resulting returns.

Key ideas

• Stocks are assigned to industries using four-digit SIC codes.
• Industry membership is determined at the end of June and held for the next July-to-June return period.
• Monthly industry returns are value-weighted by each stock's market value.
• The described exchange universe is NYSE, AMEX, and NASDAQ.

Tags

# How does Kenneth French create the industry portfolio returns?


# How does Kenneth French create the industry portfolio returns?












Kenneth Frenches Data Library includes industry portfolios.

Is this done via a software of some type.

I have some stock returns but I want to calculcated the returns of the industries in the Chinese market?

## Answer by skoestlmeier (score 2, accepted)

https://quant.stackexchange.com/a/42371

The constitution of each industry portfolio is described in each "detail"-section on Kenneth French´s homepage. The industries are defined by sorting each NYSE, AMEX, and NASDAQ stock based on its four digit SIC-code.

The sort is applied at the end of June of year $t$. Monthly returns are calculated for the subsequent year, i.e. from July of year $t$ to end of June in year $t+1$. The portfolio return is the average value-weighted return of each stock, i.e. you weight each stock return with its market-valuation (number of shares outstanding times stock price). The procedure is clearly described in the below reference.

#### Reference

Fama/French (1997), Industry Cost of Equity, Journal of Financial Economics (43).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.