security market

chandniwadhwani92
Finance Junkie
Posts: 166
Joined: Mon Oct 06, 2014 7:36 am

security market

Postby chandniwadhwani92 » Sun Nov 02, 2014 7:57 am

In market capitalization weighted index
A market capitalization weighted index can b matched with a portfolio in which the vale of each security position in the portfolio is the same proportion of the total value as the proportion of that security market capitalization to the total market capitalization of all the securities in the index.

Can u briefly explain this sentence with example??

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

security market

Postby edupristine » Mon Nov 03, 2014 12:57 pm

First you need to understand what is meant by Market Capitalization Weighted Index.

A market capitalization weighted index can be matched with a portfolio in which the value of each security position in the portfolio is the same proportion of the total value as the proportion of that security market capitalization to the total market capitalization of all the securities in the index.

Suppose there is a portfolio with three assets A, B & C with individual market caps of $200, $500, $300.

So, Total Market Cap = $(200+500+300) = $1000

Now the statement implies that asset weights in the market cap weighted index are as follows:

Asset Weight (A) = (200/1000)*100 = 20%
Asset weight (B) = (500/1000)*100 = 50%
Asset weight (C) = (300/1000)*100 = 30%


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