CFA Level I · CFA Level I Exam · Benchmarking Returns
A fundamental-weighted index weights constituents by measures such as sales, earnings or book value rather than market price. Relative to a market-capitalization-weighted index, this approach is most likely to:
A fundamental-weighted index most likely reduces the weight on overvalued stocks. Weights follow fundamentals such as sales or earnings rather than price, so a price rise does not increase the weight. This creates a value tilt relative to capitalization weighting.
- Agive the largest weights to stocks with the highest prices
- Breduce the weight on stocks that have become overvaluedCorrect
- Crequire no rebalancing because weights are independent of prices
Explanation
Fundamental weights do not rise automatically when a price rises, so overvalued stocks receive less weight than in a cap-weighted index, giving a value tilt. Weights still must be rebalanced as fundamentals change. Price-based weighting describes price-weighted indexes.
Did you get it right without looking?
One question tells you little. A timed set on Benchmarking Returns shows your real accuracy, how long you take and where you lose marks.
More Benchmarking Returns questions
- A pension plan hires a manager to deliver a stable return with low volatility, and states the goal as outperforming a 3% absolute return tar…
- An analyst evaluates a small-cap value manager against a broad large-cap growth index. The manager's holdings have very little in common wit…
- An equal-weighted index of three shares is rebalanced at the start of each year. Over the year the shares return 20%, 10% and -10%. The inde…
- Compared with a market-capitalization-weighted index, a fundamentally weighted index is most likely to:
- A portfolio manager's portfolio has weights of 50% in Sector X, 30% in Sector Y and 20% in Sector Z. The benchmark weights are 40%, 40% and …
- An index of 400 stocks is constructed from a list including only companies that are still listed at the end of the test period. A back-test …