Use Beginning-of-Period Market Capitalization for Portfolio Returns

Summary

The document answers which market capitalization to use when calculating a value-weighted portfolio return for a period. When securities are selected or the portfolio is formed at the start of the month, the starting market capitalizations provide the weights for that month’s returns. This aligns weights with the holdings known at portfolio inception.

For greater precision, the response recommends updating weights during the period and applying each set of weights to the corresponding subsequent returns. Daily or weekly reweighting can reflect changes in security values and portfolio composition. The answer does not specify a rebalancing rule, address transaction costs, or compare the bias and tracking differences between monthly and more frequent weighting.

Key ideas

• Use market capitalization at portfolio formation to weight returns over the ensuing period.
• Beginning-of-period weights align with the portfolio’s holdings at inception.
• Updating weights within the period can reflect changes in security values and composition.
• Daily or weekly weights should be paired with returns over the matching intervals.

Tags

# Value-weighted return: which date should the market-capitalization be based on?


# Value-weighted return: which date should the market-capitalization be based on?












I got a short question regarding calculating the value-weighted return of portfolios.

Example:

The portfolio is constructed based on the value of a certain criteria on date 31.1 (Jan 31st). The return for the constructed portfolio is calculated as: the closing price on 28.2 divided by the closing price on 31.1 (as it is also the opening price on 1.2). Which market-capitalization do I chose to weight the individual returns of the companies? Market-capitalization on the day of portfolio construction or the last day of the month in which I calculate the monthly return?

Thanks!

## Answer by Chris (score 1)

https://quant.stackexchange.com/a/49936

You'd use MC-weight calculated on 1/31 applied to the return for Feb (1/31 - 2/28) as these are the weights you'd have at portfolio inception. Ideally, you'd update this throughout the period (as, obviously, composition of portfolio will change with security and portfolio return) and apply each of these to trailing return in a similar manner (either using daily or weekly weights and returns).

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