Equally weighted portfolios vs value weighted portfolios: Reasons for differing betas

•Tax shield and the number of component stocks cause the systematic risk difference between equally weighted portfolios and value weighted portfolios.•The difference in systematic risk (β) depends on the default risk of component companies.•Without noise market hypothesis, the systematic risk difference between equally weighted portfolios and value weighted portfolios exists in an efficient market.•The systematic risk difference between the two weighting methods is not a market anomaly.

We prove that constituent companies’ capital structure and tax shield cause the difference in systematic risk between an equally weighted portfolio and a value weighted portfolio in an efficient market where the CAPM holds. The difference in systematic risk has positive association with component companies’ default risk.