CFA Practice Question

There are 275 practice questions for this study session.

CFA Practice Question

A value-weighted index such as the S&P 500 Composite stock index ______
A. can be misleading because high-priced stocks are assigned more weight than low-priced stocks.
B. can be misleading because low market capitalization stocks are assigned more weight than high market capitalization stocks.
C. is preferred if you want an index based on the relative market capitalization of the stocks in the index.
Explanation: Many portfolios are structured to hold larger portions, perhaps 5% of the portfolio, in individual blue chip stocks and only small amounts (perhaps 0.5%) in individual small firms that are considered more risky. In this case, a market-value-weighted index is more representative of the investment policy and should be used as a benchmark.

User Contributed Comments 3

User Comment
samco Any hint here?
julamo Value-weighted index is not based on stock prices but market caps (price x number of shares), therefore A is wrong.

Value-weighted = Market-cap weighted = high market cap has higher weight, therefore B is wrong

C is basically the definition of a value-weighted index. That's a very straight-forward question, no real challenge here...
CJPerugini @julamo - value weighted indexes are not based on stock prices alone*
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