| dc.description.abstract | Most of indexes are based on market-capitalization weighting. Many of passive funds construct their portfolios by capitalization weighting in order to follow the market performance. Capitalization-weighted portfolio have the advantage of low turnover rate, but it possibly leads the portfolio to overweight in overvalue stock, underweight in undervalue stock. Therefore, Arnott, Hsu and Moore indicate the concept of fundamental indexation, they weight portfolio by fundamental data. They want to use the method to create a better performance than capitalization-weighted portfolio.
This study adopts the method of fundamental indexation to analyze Taiwan stock market during the years 1992-2008 and 2000-2008 periods. We mainly observe whether the performances of fundamental portfolios are better than cap-weighted portfolios, and observe the performances of fundamental and cap-weighted portfolios at different risk index and conditions.
This study constructs and weights portfolios by fundamental index. The indexes are sales, free cash flow, pre-book value, book value and composite index. Our empirical results show that the performances of fundamental portfolios are better than cap-weighted portfolio, but it is not as significant as foreign research in 1992-2008. In 2000-2008, the significance of fundamental portfolios improves obviously. Free cash flow portfolio is greatest different, and the performance of sales portfolio is the best in two periods. Furthermore, the turnover rates of fundamental portfolios are slightly higher than cap-weight portfolio, but the excess return of fundamental portfolios are still positive. We think the fundamental portfolios also maintain low trading cost and low turnover rate in Taiwan stock market, and this result is according with foreign research.
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