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Equity InvestmentsModule 2 of 6

Security Market Indexes

4

Concepts

2

Formulas

1

Decisions

2

Quiz Questions

Key Concepts

4 concepts covered in this module.

Price-Weighted Index

Weight by share price (e.g., DJIA). Higher-priced stocks have more influence. Affected by stock splits.

Market-Cap Weighted

Weight by market value (e.g., S&P 500). Larger companies dominate. Free-float adjusted: exclude closely held shares.

Equal-Weighted Index

Equal weight to each stock. Must rebalance periodically. Small-cap tilt vs cap-weighted.

Rebalancing & Reconstitution

Rebalancing: adjusting weights. Reconstitution: changing index membership. Both affect tracking portfolios.

Formulas

2 essential formulas for this module.

Price-Weighted Index

Index = Σ Prices / Divisor

Where: Divisor adjusted for splits and changes

Market-Cap Weighted Return

R = Σ (wi × Ri)

Where: wi = market capi / total market cap

Decision Frameworks

1 decision frameworks to guide your analysis.

Which weighting method to prefer?

  • Cap-weighted: most common, investable, represents market portfolio
  • Equal-weighted: more diversified, no concentration risk
  • Price-weighted: simple, historical (DJIA)

Mind Map

Visual overview of how concepts connect in this module.

Market Indexes
Weighting Methods
Price-weighted (DJIA)
Cap-weighted (S&P 500)
Equal-weighted
Factor-weighted
Uses
Market sentiment gauge
Benchmark for active managers
Asset allocation proxy
Index fund basis
Index Types
Broad market
Sector
Style (growth/value)
Fixed income
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Flashcard

Price-Weighted Index

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Answer
Weight by share price (e.g., DJIA). Higher-priced stocks have more influence. Affected by stock splits.
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