CAVEAT COMPOUNDER - A WARNING ABOUT USING THE DAILY CRSP EQUAL-WEIGHTED INDEX TO COMPUTE LONG-RUN EXCESS RETURNS

This paper issues a warning that compounding daily returns of the Cent er for Research in Security Prices (CRSP) equal-weighted index can lea d to surprisingly large biases. The differences between the monthly re turns compounded from the daily tapes and the monthly CRSP equal-weigh ted indices is almost 0.43 percent per month, or 6 percent per year. T his difference amounts to one third of the average monthly return, and is large enough to reverse the conclusions of a paper using the daily tape to compute the return on the benchmark portfolio. We also invest igate the sources of these biases and suggest several alternative stra tegies to avoid them.