EOC questions--Vol 4, P 286, Q22

solution, address, instead, likely, about

Q: the types of index that would least likely address C’ concern about bias is that
A: a price-weighted index
B: a value-weighted index
C: an equal-weighted index
in the context , Concern is that avoid benchmars that bias toward small-cap stocks
the solution C make me confused thinking that it is most likely instead of least likely to lead to bias
pls help !

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发表于 2013-4-8 17:07 | 只看该作者

I know how you feel, confusing wording sucks
concern == try to avoid, least address the concern == not try to avoid==suffer from the bias

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发表于 2013-4-8 17:08 | 只看该作者

C: an equal-weighted index : An equal wtd index will have bias towards small cap stocks because if the index, say, has 10 stocks each stock will have a wt of 10%. in this case say the first two companies are very big ( 1000 bn each) as compared to other 8 stocks (50 bn each) in the index, but since eqally wtd, all will have 10%. If you are PF manager you have to take 10% exposure in each stock ( 2 large-20% and 8 small -80%). Effectively your portfolio is predominantly in small cap stocks.
The concern is to avoid this. Hence “C” does not address his concern. Hope this is clear.

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EOC questions--Vol 4, P 286, Q22

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