What does an equal weighted index methodology assume?

What does an equal weighted index methodology assume?

• A. Weight by market capitalization
• B. Weight by trading volume
• C. Equal investment in each stock
• D. Weight by share price

Answer: (C)

An equal weighted index assumes every constituent has the same influence on the index, meaning you allocate the same amount of money to each stock and overall performance is driven by equal contributions from all holdings. Because stock prices move, the weights drift, so the index is typically rebalanced at set intervals to restore equal weights. This setup emphasizes smaller companies more than a market-cap weighted index would, since they get the same weight as larger firms regardless of size. It contrasts with weighting by market capitalization (which puts more heft on bigger companies), weighting by trading volume (which reflects liquidity), or weighting by share price (which does not reflect company size).

An equal weighted index assumes every constituent has the same influence on the index, meaning you allocate the same amount of money to each stock and overall performance is driven by equal contributions from all holdings. Because stock prices move, the weights drift, so the index is typically rebalanced at set intervals to restore equal weights. This setup emphasizes smaller companies more than a market-cap weighted index would, since they get the same weight as larger firms regardless of size. It contrasts with weighting by market capitalization (which puts more heft on bigger companies), weighting by trading volume (which reflects liquidity), or weighting by share price (which does not reflect company size).