3

I recently have started to look at some data from CRSP, and they have a metric called Value Weighted Return (two versions with and without distributions).

When I looked it up, it seemed that this metric was not used anywhere else, and the explanation on the site did not help (quoted below):

VWRETD indices contain either the daily or monthly returns, including all distributions, on a value-weighted market portfolio (excluding American Depository Receipts (ADRs)).

How is this useful? What is the portfolio? If we don't know the portfolio, what makes this number meaningful?

soandos
  • 131
  • 1
  • 3
  • 1
    Why not ask CRSP for clarification? – Joshua Ulrich Mar 23 '14 at 14:11
  • it's same as market-cap weighted return, i.e. imagine a portfolio where all the dollar holdings of constituents are proportional to their market cap. the total return version ("with distributions") include dividends and other corp act, while the other one is simple price return. if you want to backtest trading strategies, the total return version would be more relevant, while indices like S&P500, Russell 3000 etc are usually quoted on price return. – uday Mar 26 '14 at 16:09

1 Answers1

0

your question is related to the concept of the market portfolio in CAPM and similar approaches in asset pricing. in theory this market portfolio includes all assets imaginable, not only stocks but everything from land to resources on Earth. in practice, it is represented by proxies, i.e. the substitutes, which are usually the traded securities. it's actually even more restricted to something like S&P 500 stocks, i.e. 500 largest equities. once you figure out which stocks you include, it's easy to compute the value-weighted return on them.

the usefulness of these indices in their relation to asset pricing theory, such as CAPM or APT. you can test various hypotheses based on these theories. you can also form portfolios based on correlations to the market portfolios (actually, their proxies)

Aksakal almost surely binary
  • 569
  • 3
  • 7