Question

Which of the following statements regarding value-weighted indexes is correct? They are biased in favor of...

Which of the following statements regarding value-weighted indexes is correct?

They are biased in favor of small market capitalization companies.

They do not automatically adjust for stock splits.

All else being equal, the return for a value weighted index over a given time period must be greater than the return earned on a price weighted index.

None of the above

The monthly returns earned on the Dow Jones Total Stock Market Index tend to be more correlated with the monthly returns of other US stock market indexes as compared to monthly returns of non-US stock market indexes.

True or False

Homework Answers

Answer #1

1. (c) All else being equal, the return for a value weighted index over a given time period must be greater than the return earned on a price weighted index as the value Weighted index tends to outperform the price weighted index because it is a fair reflection of the market size and free float and it adjust for value according to price and their respective outstanding shares.

So Statement (C) is TRUE.

Statement (A) and(B) are false as they are biased towards high market cap company and it automatically adjusts as stock split happens because of same number of free float after the split happened

2 .This is a TRUE statement as returns earned on the Dow Jones Total Stock Market Index tend to be more correlated with the monthly returns of other US stock market indexes as they follow the same level of price sentiment and news deviations. They continue to perform in sync with each other.

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