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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Understanding Index

Which statement best describes a price-weighted index compared with a market capitalisation weighted index?

In a price-weighted index, stocks with higher share prices have greater influence regardless of company size, because the index is built from the sum of prices. Market capitalisation weighted indices instead give larger companies more influence.

  1. AStocks with higher share prices have greater influence regardless of company sizeCorrect
  2. BStocks with larger market capitalisation have greater influence
  3. CAll stocks have equal influence irrespective of price
  4. DInfluence depends on the trading volume of each stock

Explanation

In a price-weighted index, the index is based on the sum of share prices, so a high-priced stock moves it more even if the company is small. Market cap weighting gives larger companies more influence. Equal influence describes an equal-weighted index.

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