CFA Level IEquity InvestmentsEasy
An equal-weighted index is created from three stocks priced at $20, $50, and $100, with an equal dollar amount invested in each. Over the next period, the $20 stock rises to $22, the $50 stock falls to $45, and the $100 stock rises to $110. What is the index return for the period?
- A6.67%
- B0.00%
- C3.33%
- D10.00%
Show answer & explanationAnswer & explanation
Correct answer: C. 3.33%
In an equal-weighted index, the index return is the simple average of the individual stock returns. Returns: (22-20)/20=+10%, (45-50)/50=-10%, (110-100)/100=+10%. Average = (10%-10%+10%)/3 = 3.33%.
Why the other options are wrong
- A. Incorrect; this would result from averaging only two of the three returns.
- B. Incorrect; this ignores the two positive returns that outweigh the negative one.
- D. Incorrect; this is the return of a single stock, not the equal-weighted average.
Equal-Weighted Index Return
In an equal-weighted index, each constituent receives the same dollar weight, so the index return equals the simple (arithmetic) average of the individual stock returns.
- Weight per stock = 1/n regardless of price or market cap
- Index return = simple average of constituent returns
- Requires periodic rebalancing to maintain equal weights
Memory trick: Equal weight, equal voice — just average the returns.