macrocephalopod

I am *shocked* that a physicist who claims to have a theory of everything for finance has fundamental misconceptions about how basic things like “stock indices” work.

It seems what that paper is actually saying is that the S&P500 suffers from survivorship bias if used as a proxy for a generic diversified investment in US stocks, which I think is true, given it will not have the same distribution as a basket of all tradable US stocks

Maybe @ole_b_peters or @alex_adamou will care to explain what did they mean when they wrote that the S&P 500 suffers from survivorship bias.

Isn't it clear in the quote? It is, by definition, an index of 500 successful companies, from which constituents are removed when they cease to be successful. So it's a basket of winners (survivors). Happy to be corrected factually by a market expert if wrong.

The historical performance of the index includes the performance all of the companies that were removed hence there is no survivorship bias in the index. This is a very simple concept and it is incredible that you don’t seem to understand it.

Like, you either don’t understand how the index performance is calculated or you don’t understand what “survivorship bias” means and either of those is pretty amazing if you are writing papers claiming to revolutionise finance.

Now include the transaction costs from daily rebalancing to equal-weight and see what that does to the returns of the equal-weight portfolio!