Equity Investments - Equity Investments Section 1
- Option : A
- Explanation : Equal weighing and fundamental weighting methods require rebalancing. Price weighting does not require rebalancing.
37. Which of the following is least likely a characteristic of fundamental weighting of an index?
- Option : B
- Explanation : Fundamental indices use a single measure, such as total dividends, to weight the constituent securities. Fundamentally weighted indices generally will have a contrarian “effect” in that the portfolio weights will shift away from securities that have increased in relative value and toward securities that have fallen in relative value whenever the portfolio is rebalanced. All shares are included in a fundamental weighted index.
38. Which of the following type of market index most likely requires frequent rebalancing?
- Option : A
- Explanation : This is because after an equal weighted index is constructed and the prices of constituent securities change, the index is no longer equally weighted. Therefore, maintaining equal weights requires frequent adjustments (rebalancing) to the index.
- Option : C
- Explanation : Fundamental weighting leads to indices that have a relative value tilt i.e. the contrarian „effect‟, where portfolio weights will shift away from securities that have increased in relative value and towards securities that have fallen in relative value whenever the portfolio is rebalanced.
- Option : A
- Explanation : Price and value-weighted are adjusted to their correct values by changes in prices. Therefore, rebalancing is only carried out for equal weighted indexes and these experience high transaction costs.
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