In a market-capitalization weighted index, how are the weights determined?

• A. The market capitalization is calculated using an equal number of shares (e.g. each constituent is capped at 100 shares)
• B. Constituents are selected purely on trading volume
• C. The constituents are weighted based on the company's total value or capitalization (share price x shares outstanding)
• D. Each security has a maximum price allowed or a 'market cap' price

Answer: (C)

In a market-capitalization weighted index, a company’s influence on the index is proportional to its total market value. The weight is found by dividing that company's market capitalization (share price times shares outstanding) by the total market capitalization of all index constituents. This means larger companies contribute more to the index’s movements. For example, if one company has a market cap of 60 billion and another has 40 billion, their weights are 60% and 40% respectively. The other options describe equal weighting, weighting by trading volume, or using a price cap, which are not how a market-cap-weighted index assigns weights. The weights change as prices or shares outstanding change, so periodic rebalancing reflects current market values.