Article in the Financial Analysts Journal, March-April 2005, Volume 61, Number 2.

AIM: Investigate whether stock market indexes based on an array of cap-indifferent measures of company size are more mean–variance efficient than those based on market cap.

AUTHORS:
Robert D. Arnott, chairman of Research Affiliates, LLC. and Editor of the Journal
Jason Hsu, director of research at Research Affiliates, LLC.
Philip Moore, vice president of sales and marketing at Research Affiliates, LLC.

ABSTRACT:
A trillion-dollar industry is based on investing in or benchmarking to capitalization-weighted indexes, even though the finance literature rejects the mean–variance efficiency of such indexes. So called "Fundamental" indexes were found to deliver consistent, significant benefits relative to standard cap-weighted indexes. The true importance of the difference may have been best noted by Benjamin Graham: In the short run, the market is a voting machine, but in the long run, it is a weighing machine.