Investments, tenth edition

  Equally Weighted Indexes 

 Market performance is sometimes measured by an equally weighted average of the returns 

of each stock in an index. Such an averaging technique, by placing equal weight on each 

return, corresponds to an implicit portfolio strategy that invests equal dollar values in each 

stock. This is in contrast to both price weighting (which requires equal numbers of shares 

of each stock) and market-value weighting (which requires investments in proportion to 

outstanding value). 

 Unlike price- or market-value-weighted indexes, equally weighted indexes do not corre-

spond to buy-and-hold portfolio strategies. Suppose that you start with equal dollar invest-

ments in the two stocks of  Table  2.3 , ABC and XYZ. Because ABC increases in value 

by 20% over the year while XYZ decreases by 10%, your portfolio no longer is equally 

weighted. It is now more heavily invested in ABC. To reset the portfolio to equal weights, 

you would need to rebalance: Sell off some ABC stock and/or purchase more XYZ stock. 

Such rebalancing would be necessary to align the return on your portfolio with that on the 

equally weighted index.