NISM Certifications · NISM-Series-VIII: Equity Derivatives · Understanding Index
Which statement about a price-weighted index is correct?
In a price-weighted index, stocks with higher share prices have greater influence. The index is derived from the sum of constituent prices, so a high-priced share moves it more than a low-priced share, irrespective of the company's market capitalisation.
- AStocks with higher share prices have a greater influence on the indexCorrect
- BStocks with higher market capitalisation always have greater influence
- CAll constituents carry equal weight regardless of price
- DWeights are set by free-float factor only
Explanation
In a price-weighted index, the index is based on the sum of constituent prices, so a higher-priced stock moves the index more regardless of company size. Equal weighting gives each stock the same weight, and market-cap weighting uses size.
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