A ________-Weighted Index and a ________-Weighted Index are equivalent to the va
ID: 2613390 • Letter: A
Question
A ________-Weighted Index and a ________-Weighted Index are equivalent to the value of a portfolio of N assets where we simply buy one "share" of each asset. A ________-Weighted Index, on the other hand, is equivalent to the value of a portfolio where the number of shares bought are proportional to the total market value of each share.
Equally, Value, Price
Equally, Price, Value
Price, Equally, Level
Value, Equally, Price
a.Equally, Value, Price
b.Equally, Price, Value
c.Price, Equally, Level
d.Value, Equally, Price
Explanation / Answer
An equally weighted index weights each stock equally regardless of its market capitalization or economic size (sales, earnings, book value). Due to daily price movements of the stocks within the index, the portfolio must be constantly re-balanced to keep the positions in each stock equal to each other.
A Value Weighted Index weights stocks within the relevant universe based on a calculation of each stock's absolute and relative value as compared to the other stocks within the index universe. The index is continually rebalanced to weight most heavily those stocks that are priced at the largest discount to various measures of value. The index is updated as prices and company fundamentals change.
A Price Weighted Index is a stock index in which each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index.
Therefore,
A Equally-Weighted Index and a Value-Weighted Index are equivalent to the value of a portfolio of N assets where we simply buy one "share" of each asset. A Price-Weighted Index, on the other hand, is equivalent to the value of a portfolio where the number of shares bought are proportional to the total market value of each share.
Answer is a.
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