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CFA Level I · CFA Level I Exam · Equity Issuance and Trading

An index provider constructs an equal-weighted index of 50 stocks and rebalances it quarterly. Compared with a market-capitalization-weighted index of the same stocks, the equal-weighted index most likely has:

The equal-weighted index most likely has greater exposure to small-capitalization stocks and higher turnover. Each stock gets the same weight, so small companies are overweighted versus market-cap weights, and periodic rebalancing requires trading to restore equal weights, while a market-cap index adjusts naturally with price changes.

  1. Agreater exposure to large-capitalization stocks and lower turnover
  2. Bthe same exposure to each stock as the market-cap-weighted index
  3. Cgreater exposure to small-capitalization stocks and higher turnoverCorrect

Explanation

Equal weighting gives each stock 2%, which overweights small companies relative to their market-cap weights. Rebalancing back to equal weights after price moves requires selling winners and buying losers, so turnover is higher. Market-cap weighting drifts naturally with prices and needs little trading.

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