CFA Level I · CFA Level I Exam · Benchmarking Returns
Compared with a market-capitalization-weighted index, an equal-weighted index of the same stocks is most likely to exhibit:
An equal-weighted index most likely has a greater tilt toward small-capitalization stocks. Every constituent receives the same weight, so small firms matter more than in a cap-weighted index. It also needs frequent rebalancing, which raises turnover.
- Aa greater tilt toward small-capitalization stocksCorrect
- Blower turnover because weights drift with prices
- Ca greater exposure to the largest companies
Explanation
Equal weighting gives small companies the same weight as large ones, so it tilts toward small caps. It requires periodic rebalancing to restore equal weights, which raises turnover rather than lowering it. Exposure to the largest firms is lower, not greater.
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