Let's know about equal weighted portfolio!

What is an equal-weighted portfolio? 

Equal-weighted portfolio (abbreviated as EWP) is a portfolio construction strategy in which, equal weightage is given to all the stocks in the portfolio, irrespective of their market cap. It means that the small-cap stocks, which are riskier as compared to large-cap stocks, have the same weightage as the latter in the portfolio. This characteristic increases the potential of the portfolio to generate higher returns. Owing to higher stock turnover, the higher trading cost is an inherent feature of the portfolio. 

Features 

Apart from the two above-mentioned features, an equal-weighted portfolio is also characterised by: 

1) Lower concentration risk 

2) Higher exposure to small-cap stocks 

3) Higher portfolio turnover 

4) Greater potential for diversification  

These features can be attributed to the equal weightage given to all the stocks in the portfolio as compared to a value-weighted portfolio that gives weightage to stocks as per their market capitalisation. 

Significance 

As per the research done by DeMiguel et al in 2009 and Plyakha et al in 2015, equal-weighted portfolios appear to outperform 14 different portfolio weighting strategies. And since the equal-weighted portfolio does not rely on expected average returns, it is assumed to be more robust compared to other price-weighted or value-weighted (VW) strategies. Moreover, an equal weighting strategy minimises the risk of a portfolio deviating from the investor's target allocation objectives.