CFA Level I · CFA Level I Exam · Benchmarking Returns
An analyst builds a price-weighted index from three stocks. Which of the following is the most likely consequence of this weighting method?
A stock split in a constituent lowers its weight in a price-weighted index. Weights depend on share price relative to the sum of prices, so a split that reduces the price reduces the weight. Market capitalization plays no role in this method.
- AA stock split in one constituent lowers that stock's weight in the indexCorrect
- BStocks with the largest market capitalization always carry the largest weights
- CEach constituent receives the same return contribution regardless of its price
Explanation
In a price-weighted index, weight equals a stock's price divided by the sum of all prices. A split cuts the share price and so reduces its weight. Market capitalization does not drive weights, and equal contribution describes equal weighting, not price weighting.
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