equalweighting

Equalweighting is an investment strategy where all assets in a portfolio are given the same allocation. This means that regardless of an asset's market capitalization, price, or any other factor, its proportion in the portfolio is identical to every other asset. For example, in an equal-weighted portfolio of three stocks, each stock would represent one-third of the total investment.

This approach contrasts with market-capitalization-weighted strategies, which are more common in many index funds. In market-cap weighting, larger companies have a proportionally larger influence on the index's performance. Equalweighting, therefore, gives smaller companies a more significant role in the portfolio's overall return profile.

The primary goal of equalweighting is to mitigate the concentration risk inherent in market-cap-weighted portfolios. By spreading investments evenly, investors are less exposed to the performance of a few very large companies. This can lead to greater diversification and potentially smoother returns over time, as the influence of any single asset's volatility is reduced. However, it also means that the portfolio's performance might not fully capture the growth of the largest, most successful companies. Equalweighting is a systematic approach that can be applied to various asset classes, including stocks, bonds, and commodities.