One of two common ways to combine multiple stocks into a single portfolio return.
An equal-weight portfolio puts the same dollar amount into every holding, regardless of company size — twenty stocks means roughly 5% of the portfolio in each, whether the company is worth $10 billion or $200 billion.
A market-cap-weighted portfolio (like most major indices, including the S&P 500) puts more money into bigger companies and less into smaller ones — a handful of the largest companies can end up driving most of the portfolio's return.
Equal-weighting keeps a small number of mega-cap companies from dominating and masking how the actual factor selection performed — it's a more direct test of whether the underlying stock-picking logic works, rather than a test of how a few giant companies happened to do.
Equal-weight portfolios tend to have more exposure to smaller companies than a market-cap-weighted one would, which usually means more volatility in both directions — something to keep in mind when comparing an equal-weighted backtest number to a market-cap-weighted benchmark like the S&P 500 itself.
What is survivorship bias (and why the backtest on this site flags it)? What is CAGR, and how should you read one from a backtest?
Not investment advice. ← All investing terms · Screen stocks yourself →