Equally weighted index
An equal-weighted index is a type of stock index that is calculated by assigning the same number of weights to each security in the index. For example, if we build an index of equal weight with 50 stocks (stocks of companies for example), each one will represent 2% of the index.
The change in any stock in the index will have the same impact on the movement of the index. Value-weighted indices are typically viewed as the stock indices that best reflect an efficient market portfolio, although some studies reveal that an equal-weighted index works best for some markets.
- By having the same weighting for all the values of the index, none of them will condition the value of the index more than others.
- They better represent market sentiment because they reveal an average of the performance of each of the securities that make up the index.
- In order to maintain the same weighting of each security, it is necessary to carry out a continuous rebalancing and adjustment of the index, selling the securities that are performing better and buying those that are performing the worst.
- Including very small values can mean that some of them are not very liquid.
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