Which weighting method assigns weights based on price rather than market value?

Which weighting method assigns weights based on price rather than market value?

• A. Market capitalization weighting
• B. Equal weighting
• C. Price weighting
• D. Volume weighting

Answer: (C)

Weighting by price means each component’s influence in the index (or portfolio) is determined by its price alone, not by how large the company’s overall value is. In a price-weighted scheme, higher-priced stocks carry larger weights, so their movements move the index more—even if their total market value or number of shares isn’t proportionally bigger. This is different from weighting by market value (market capitalization), which uses price times shares outstanding; equal weighting, which gives every component the same weight regardless of price; and volume weighting, which uses trading volume to determine weights. So the correct method for weights based on price is price weighting. For example, a stock priced at $150 will have more influence than a stock at $75 purely because of its higher price, all else equal.

Weighting by price means each component’s influence in the index (or portfolio) is determined by its price alone, not by how large the company’s overall value is. In a price-weighted scheme, higher-priced stocks carry larger weights, so their movements move the index more—even if their total market value or number of shares isn’t proportionally bigger. This is different from weighting by market value (market capitalization), which uses price times shares outstanding; equal weighting, which gives every component the same weight regardless of price; and volume weighting, which uses trading volume to determine weights. So the correct method for weights based on price is price weighting. For example, a stock priced at $150 will have more influence than a stock at $75 purely because of its higher price, all else equal.