Market Capitalization-Weighted Index Characteristics

Easy Passive Equity Investing Index Construction

In the realm of passive equity investing, index construction is a critical process that determines how well an index represents the performance of its intended market segment. One common method of index construction is the market capitalization-weighted approach. In this method, the larger the company's market capitalization, the greater its weight in the index. This question explores the characteristics of market-capitalization weighted indices.

Which of the following statements accurately describes the implications of using a market capitalization-weighted index?

Investors are exposed to lower volatility since larger companies are generally more stable.

The index will be skewed towards sectors with larger companies, which may lead to concentration risk.

All companies in the index contribute equally to its performance regardless of their size.

Hint

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