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Equally Weighted Portfolios of Randomly Selected Stocks and the Individual Investor
Authors:Theo Katz Battaglia
Institution:Oil and Gas Department, Brazilian National Social and Economic Development Bank (BNDES), Rio de Janeiro, Brazil
Abstract:The article contrasts 500 randomly formed equally weighted portfolios (1/N) to 221 actively managed stock funds, individual stocks, and the IBrX-50 index, representing indexed stock funds, considering transaction costs. The sample are the 50 stocks in IBrX-50 index in January 2007 throughout 60 months. Investors are likely to achieve greater returns and return-to-risk ratios with a randomly formed 1/N portfolio than with a stock fund, particularly those targeting retail investors, or one of the 50 stocks also randomly drawn. These portfolios would also outperform the IBrX-50. Robustness tests with variations in size and frequency of rebalancing do not change conclusions.
Keywords:Brazil  Brazilian stock funds  emerging markets  equally weighed portfolios  individual investors  portfolio simulation
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