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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.

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
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


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

The process of changing the constituent securities in an index.

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