Statement: An equally weighted indices are not investable because they are not rebalanced often. Question - Can someone elaborate further how an equally weighted indices are not investable? No explanation given in Schweser Practice Exam. Thanks.
Because an equal weight index would require continual rebalancing? One it is rebalanced to equal weight, changes in the underlying will knock it out of balance immediately? Just a guess.
JustPass gave a good explanation. You would constantly have to rebalance the portfolio which is expensive.
ok thanks to all
what is the weighting based on? one share of each company or 1 dollar of each company. This always confuses me. Thanks
1 dollar of each company. 1 share of each would be price weighted…i think…
mumu is right equal weighted is $ term price weighted is 1 share of each company cap weighted is shares* price
Just to add to the point of not investable… Since equal weight is buying $1 of each security, in practice, stock are not divisible, it is hard to buy $1 worth of stock…therefore makes it very hard to create a equal weight portfolio.
Let’s analysis further for a better understanding: Three stocks in the market: Year 1 Stock A, market price US$500 (total float = 100 shares) Stock B, market price US$1,000 (total float = 200 shares) Stock C, market price US$2,000 (total float = 300 shares) Total market capitalisation = US$850,000 Assume investment portfolio available = US$100,000 a) Market cap weighted Stock A, US$5,882 (5.9% x US$100k) Stock B, US$23,529 (23.5% x US$100k) Stock C, US$70,588 (70.6% x US$100k) Total portfolio valuation = US$100k b) Equally weighted Stock A, US$33k Stock B, US$33k Stock C, US$33k Total portfolio valuation = US$100k c) Price weighted Stock A, US$14,285 (500/3500 x US$100k) Stock B, US$28,571 (1000/3500 x US$100k) Stock C, US$57,143 (2000/3500 x US$100k) Total portfolio valuation = US$100k Is this correct?