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just a very short question regarding value-weighted portfolios. As the results are not as expected I try to cancel out any possible wrong assumptions.

I created five portfolios à 100 companies out of the S&P500 depending on their market-to-book-value ratio. As I'm calculating value-weighted monthly returns for each portfolio I multiply each monthly returns with (MCap company/ total MCap portfolio) right? Thought a second about the weight on the S&P but it doesn't make sense in my eyes yet I want to be sure I'm not having a error in reasoning.

Thanks!

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  • $\begingroup$ That's right. You divide the market value of each company by the sum of the market values of companies in your portfolio. That gives you the weight (which will be between 0 and 1). $\endgroup$ – Alex C Nov 11 '19 at 15:13
  • $\begingroup$ thanks for your help! $\endgroup$ – user43224 Nov 13 '19 at 13:05
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Strictly speaking, that approach gives you cap-weighted returns for value buckets. If you actually wanted a value-weighting you could apply a fundamental weighting (eg, P/B, P/Sales) or a growth/value percentage applied to MC a la Russell Style indexes.

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  • $\begingroup$ thanks also to you! $\endgroup$ – user43224 Nov 13 '19 at 13:06

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