Equal-weighted

Giving every constituent of an index or portfolio the same weight. It tilts towards smaller companies and must be traded back after every move, so its published return overstates what a fund nets.

Where you will meet it

Equal-weighted appears in 4 learning outcomes on the CFA syllabus. A few of them:

• Contrast indexes weighted by price with those weighted by market capitalisation
  CFA Level I · Equity Investments

  “An equal-weighted index gives every constituent the same say, which tilts toward smaller companies and needs constant rebalancing to stay equal.”

• Work out values and returns for indexes weighted by price, by market capitalisation and equally
  CFA Level I · Quantitative Methods

  “An equal-weighted index averages the constituents' returns, which tilts it towards smaller companies and requires regular rebalancing.”

• Explain the GIPS rules for calculating composite returns, including the permitted ways of asset-weighting the returns of member portfolios
  CFA Level III · Performance Measurement

  “An equal-weighted average would show 3.5%, overstating what the typical dollar earned because the small account happened to do better.”

• Explain how indexes are rebalanced and reconstituted
  CFA Level I · Equity Investments

  “Equal-weighted and fundamentally weighted indexes must be traded back to target periodically, so their reported returns overstate what an investor nets after costs.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

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