Understanding Price-Weighted Indices

Very Easy Passive Equity Investing Index Construction

In the context of passive equity investing, investors often seek to replicate the performance of a benchmark index. One of the key focuses of index construction is determining how the constituent stocks are selected and weighted within the index.

Which of the following best describes a price-weighted index?

An index that gives equal weight to all constituent stocks, regardless of their market capitalization.

An index that weights constituent stocks according to the stock price, meaning higher-priced stocks have a greater influence on the index's performance.

An index that assigns weight based on the relative market capitalization of the constituent stocks.

Hint

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