CFA Level I · CFA Level I Exam · Benchmarking Returns
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 index return is closest to:
The index return is about 6.7%. An equal-weighted index starts the period with the same weight in each share, so its return is the arithmetic average of the constituent returns: (20% + 10% − 10%) divided by three.
- A3.3%
- B6.7%Correct
- C10.0%
Explanation
With equal weights at the start of the period, the index return is the simple average of the returns: (20% + 10% − 10%)/3 = 20%/3 = 6.7%. The 3.3% option wrongly averages incorrectly by dividing by six; 10% ignores the negative return.
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