CFA Level I · CFA Level I Exam · Benchmarking Returns
An index provider constructs a price-weighted index of three shares priced at 20, 50 and 80. Which share most likely has the greatest influence on the index return when each share rises by 10%?
The share priced at 80 has the greatest influence. A price-weighted index gives each constituent a weight proportional to its price, so the same percentage move in the highest-priced share changes the price sum, and therefore the index, by the largest amount.
- AThe share priced at 20
- BThe share priced at 50
- CThe share priced at 80Correct
Explanation
In a price-weighted index, weights are proportional to share price. A 10% rise in the 80 share adds 8 to the price sum, versus 5 and 2 for the others. So the highest-priced share has the greatest influence.
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