Research done at Cass Business School and sponsored by Aon Hewitt has found that randomly constructed equity indicies - approximating monkeys with typewriters - would have performed better in risk-adjusted terms over the last 40 years than an equivalent market capitalisation-weighted index.
Co-author Professor Clare:
We programmed a computer to randomly pick and weight each of the 1,000 stocks in the sample; we effectively simulated the stock-picking abilities of a monkey. The process was repeated 10 million times over each of the 43 years of the study.The results of this experiment showed that many of the monkey fund managers would have generated a superior performance than was produced by some of the alternative indexing techniques. However, perhaps most shockingly we found that nearly every one of the 10 million monkey fund managers beat the performance of the market cap-weighted index.
Market-cap weighted investments total billions of dollars. Perhaps investors could cut costs by replacing their traders with monkeys?