Market-capitalisation-weighted
Weighting each constituent by the market value of its shares. Weights move with prices on their own, so trading is needed only when shares outstanding change, giving the lowest turnover.
Where you will meet it
Market-capitalisation-weighted appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Contrast indexes weighted by price with those weighted by market capitalisation
“A market-capitalisation-weighted index weights by value, which matches what an investor holding the whole market would own, but tilts toward whatever has already risen.”
- Work out values and returns for indexes weighted by price, by market capitalisation and equally
“A market-capitalisation-weighted index weights by price times shares outstanding, so the largest companies dominate and the index rebalances itself as prices move.”
- Contrast factor-tilted index strategies with plain market-cap-weighted indexing
“They stay transparent and cheaper than active management, yet bring higher turnover, capacity limits, factor crowding and long spells of underperformance against the cap-weighted market.”
- Weigh the factors that matter when selecting a benchmark for an equity mandate
“Check reconstitution and rebalancing frequency, since frequent changes raise the cost of replication, and check concentration, because cap-weighted indexes can be dominated by a few names.”
Practise it
Practise market-capitalisation-weighted until it is automatic: questions that explain every wrong option.
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