Characteristics of Market Capitalization-Weighted Index

Easy Passive Equity Investing Index Construction

As an aspiring equity portfolio manager, you are studying index construction methods for a passive equity strategy. You read about different approaches to selecting the underlying securities for a market index.

There are primarily two popular index construction methodologies: the price-weighted index and the market capitalization-weighted index. Understanding the implications of each method is crucial since it influences the portfolio's risk and return profile.

Which of the following statements correctly describes a characteristic of a market capitalization-weighted index?

The weight of each security in the index is determined solely by its stock price.

The index is constructed to ensure equal investment in all included equities.

The weight of each security is proportional to its market capitalization relative to the total market capitalization of all securities in the index.

Hint

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