CFA Practice Question

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CFA Practice Question

Which of the following is not true?
A. Un-weighted or equally weighted indices must be rebalanced after every stock split.
B. Value-weighted indices are more sensitive to large market capitalization stocks.
C. Un-weighted or equally weighted indices assign equal weight to all stocks.
Explanation: Un-weighted indices are not rebalanced. They are typically used to compute returns, in which case equal weight is given to the return (properly measured) of each stock. There is no balancing because there are no weights.

User Contributed Comments 8

User Comment
szyrmer Why is C wrong? Don't low priced stocks affect price weighted indexes much more than high priced stocks?
Thomy22 to szymer share A 1,00 USD share B 100,00 USD INDEX 101
share A ups 1% to 1,01 ... index from 101 to 101,1
share B ups 1% to 101 ... index from 101 to 102
kazec1 szyrmer, I think by assign equal weight to all stocks, it means equal value weight. That looks to me to be the only way C is stating the correct thing.
gill15 In the text it goes thru an equal weighted example that IS rebalanced....dont understand why I is wrong...
alles indeed equal weighted indexes have to be rebalanced to return them to an equal weighted situation. This is because of the different returns that the component securities have over time, which makes the relative weights depart from the initial 1/n weighting.
alles but it's true that they don't need to be rebalanced due to a stock split.
khalifa92 theres no balance because there are no weights, then why C is correct do u give equal weights for un-weighted index ? so stupid
edrei7 For unweighted/equally-weighted indices, the change in the index is brought about by the stocks' return. Although rebalancing is required after prices have increased, stock splits don't. Because stock splits don't affect the stocks' return.
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