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CFA Level I · CFA Level I Exam · Benchmarking Returns

Compared with a market-capitalization-weighted index, a fundamentally weighted index is most likely to:

A fundamentally weighted index most likely tilts toward value shares. It weights constituents by measures such as sales, earnings or dividends instead of market price, so shares with high prices relative to fundamentals receive smaller weights than under market-capitalization weighting.

  1. Aoverweight shares that have recently risen in price
  2. Btilt toward value shares through its weighting schemeCorrect
  3. Chold each constituent at the same weight at every rebalance

Explanation

Fundamental weights use measures such as earnings, dividends or sales rather than price, so overpriced shares receive lower weights relative to cap weighting. This creates an implicit value tilt. Overweighting past winners describes cap weighting; equal holdings describe equal weighting.

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