Fundamental Indexing Around the World

If a fundamentally weighted portfolio is to outperform a capitalization-weighted port- folio of the same stocks, then the fundamental variables used to construct the weights should contain more information about the fair values of the stocks than the market values of the stocks contain. [...] The net payout is defined as the sum of distributed dividends, plus the total expenditures used to decrease the outstanding shares (repurchases), minus the proceeds received from the sale of shares (equity is- suance) over the past year. [...] The weight of a firm in the composite portfolio wcomp,i,t is calculated as the average of the weights each firm would have in the four individual metrics. [...] The test statistic for the alpha is respectively the intercept from the corresponding regres- sion of the performance attribution model, studentized by the estimated standard deviation of the test statistic using the Parzen kernel, see Andrews (1991). [...] The SMB (small minus big) portfolio, meant to mimic the risk factor in returns related to size, is the difference, each month, between the simple average of the re- turns on the three small-stocks portfolios and the simple average of the returns on the three big-stock portfolios, calculated as follows: (S/L + S/M + S/H)/3 – (B/L + B/M + B/H)/3.