Whether EMH is correct or not, the market represents the dollar weighted aggregate opinion of the market participants.willthrill81 wrote: ↑Thu Sep 13, 2018 4:40 pmAgain, if the EMH is correct, then any large holding of stocks should be expected to have the same risk-adjusted returns, whether that holding is centered around cap weighting, equal weighting, or any other scheme. The question then comes down to one of costs, and cap weighting is certainly less costly to implement, at least now.aristotelian wrote: ↑Thu Sep 13, 2018 3:30 pm"Diversification" is subjective. Ultimately the debate is semantic. I am not sure there is an argument on either side.
Setting aside the diversification question, market cap is consistent with efficient markets. You are weighting shares of companies according to their market value. Equal weighting contradicts this. It says there is something that the market doesn't know. In this case, you aren't necessarily trying to beat the market return with the same risk, rather you are trying to reduce risk with the same return.
If EMH is true, all the bets are fair, some are more risky then others, but there is no advantage to one side or the other just a trade of risk/return.
IF EMH is not true, people who don't know more or have above average access to information or trading positions are at a disadvantage.
https://web.archive.org/web/20170429061 ... ssive.html
... In other words, market efficiency protects the less-skilled investor from consistently making bad investments because all stocks are fairly priced. There is, on the other hand, no such protection in a market where stocks are routinely mispriced. The active investing majority that underperforms the index will tend to be the same year after year. Thus, the argument for indexing is even stronger for individual investors if the stock market is not efficient. The game of poker provides, in some respects, an instructive analogy. Poker is a zero sum game, similar to active investing compared to indexing, and poker combines luck and skill, consistent with the assumption of a less than perfectly efficient market. An old adage among professional poker players applies to those deciding to participate in the active investing game. "If you don't know who the mark is, get up and leave the table, because it's you."
About two-thirds of all active investors, whose only financial justification for being active is beating the index, must fail in that objective each year. Press reports that quote the failure rate as substantially higher or lower in any given year, either track only one category of investor, or do not properly measure all active management costs. The two-thirds failure rate among all active investors is as mathematically certain as the forecast that exactly half of the workforce will earn less than the median income. It may seem unfair, but it cannot be otherwise. No amount of hope and luck (if the market is efficient) or work and skill (if it is not) can change that fact. Each individual investor should confront the question "Am I in the top third of everyone who thinks they are?" and the unavoidable answer "Probably not."