Market-Cap Weights Within Value-Sorted Portfolios

Summary

The document clarifies how to calculate returns for portfolios formed by sorting S&P 500 companies on market-to-book ratios. For a value-weighted return within each bucket, each constituent’s monthly return is multiplied by its market capitalization divided by the total market capitalization of that bucket. The resulting portfolio return is market-cap weighted among the companies selected for that group; it is not a weight based on the whole index.

The answer distinguishes sorting on a value characteristic from weighting by that characteristic. If the intended construction is fundamentally weighted, the portfolio can instead use a fundamental measure such as price-to-book or price-to-sales, or combine market capitalization with a value or growth allocation as style indexes do. The exchange offers a concise methodological clarification but no empirical results, detailed index methodology, or discussion of rebalancing and implementation choices.

Key ideas

• Within each value-sorted bucket, market-cap weights use the bucket’s total capitalization as the denominator.
• This produces capitalization-weighted returns for groups selected by market-to-book ratio.
• Sorting by a value metric does not itself make portfolio weights value weighted.
• A fundamental-weighted portfolio can assign weights using measures such as price-to-book or price-to-sales.
• Style index methods may combine market capitalization with value or growth allocations.

Tags

# Value-weighted Portfolio Confusion


# Value-weighted Portfolio Confusion












just a very short question regarding value-weighted portfolios. As the results are not as expected I try to cancel out any possible wrong assumptions.

I created five portfolios à 100 companies out of the S&P500 depending on their market-to-book-value ratio. As I'm calculating value-weighted monthly returns for each portfolio I multiply each monthly returns with (MCap company/ total MCap portfolio) right? Thought a second about the weight on the S&P but it doesn't make sense in my eyes yet I want to be sure I'm not having a error in reasoning.

Thanks!

## Answer by Chris (score 2, accepted)

https://quant.stackexchange.com/a/49650

Strictly speaking, that approach gives you cap-weighted returns for value buckets. If you actually wanted a value-weighting you could apply a fundamental weighting (eg, P/B, P/Sales) or a growth/value percentage applied to MC a la Russell Style indexes.

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