Loading....
Coupon Accepted Successfully!

 
Price Indexes & Bias

Price Weighted: Weighted avg. of prices of index stocks, divisor adjusted for splits, biased downward due to splits of good performers.

Market cap Weighted: Base period value increased by %age increase in total market value of index firms' stock, large cap stocks have greater influence.

Equal Weighted: Either arithmetic or geometric
mean of individual index stock returns, geometric mean has downward bias.

Question:
Stock bonus is most likely to cause downward bias in which of the following index weighting schemes?
  1. Price weighted
  2. Value weighted
  3. Equal weighted
Ans:
Stock bonus are generally issued by successful companies and hence it reduces their current market price & weightage in price weighted index post ex-bonus date. Hence stock bonus is likely to have downward bias on price weighted index.
Rebalancing & Reconstitution

Rebalancing:

The process of adjusting the weights of each security in the index.
 
Reconstitution:

The process of changing the constituent securities in an index.




Test Your Skills Now!
Take a Quiz now
Reviewer Name