I got a question regarding the analysis of the value premium in the U.S. stock market.
The task is to use the market-to-book-value ratio to split the S&P500 in five portfolios (rank 1-100,101-200,..). Subsequently I have to do a regression for excess returns and analyze the alphas.
I'm just not sure wheter I should weight the companies within the portfolios equally or based on their market cap. I'd say that choosing equal weights would emphasize small companies. Because of the (small-)size effect I expect the observed value premium to be larger, with value-weights smaller.
But what is one method more appropriate/ better? I'm using Kenneth Frenchs market premium which is value-weighted, maybe because of that I should also use value-weighted portfolios?
Happy to hear your thougts!