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Benchmark Weighting

Assets are weighted in a variety of ways, depending on the benchmark.

Market-value weighting: If assets are market-value weighted, they are weighted according to their market capitalization. An asset’s market capitalization is found by multiplying share price by outstanding shares. This weighting method assumes that market capitalization is a viable representation of asset size. Market-value weighting is the primary way that most benchmarks weight assets. Indexes that are market-value weighted include the S&P 500; NASDAQ; and most MSCI global, country, and regional benchmarks. These benchmarks give a higher weighting to stocks with a greater market capitalization.

Price weighting: Benchmarks that use price weighting assume that the weight of a stock should be related to the price of the stock. In other words, a stock that trades at $10 is considered twice as important as a stock that trades at $5. Price-weighted benchmarks base the weight of an asset on the price of the stock. Examples of price-weighted benchmarks include the Dow Jones Industrial Average and Japan’s Nikkei index.

Equal weighting: Equally weighted benchmarks consider all stocks to have the same weight. These benchmarks place the same value on a stock with a market capitalization of $50 billion as they do on a stock with a market capitalization of $250 million. Examples of equally weighted benchmarks include the Value Line index and the MSCI Equal Weighted index.

Float weighting: Benchmarks that use float weighting assume that asset weightings should be based on both market capitalization and the amount of float outstanding. The amount of float outstanding refers to the number of shares that are actually available to investors (usually international investors); the amount of float outstanding does not include shares that are held by insiders or shares that are available only to local country investors. Examples of benchmarks that use this weighting system include the S&P/IFC Emerging Markets Free index and the MSCI Emerging Markets Free index. These benchmarks give a higher weight to companies that have more shares in the marketplace and companies that do not limit foreign ownership.


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