Value Weighting

D

The correct answer is D. Capitalization weighting.

Capitalization weighting, also known as market-value weighting or value weighting, is a method of calculating the value of a stock market index. In this method, the weight of each stock in the index is determined by its market capitalization, which is the total value of the company's outstanding shares of stock.

Market capitalization is calculated by multiplying the number of outstanding shares by the current market price of the stock. The weight of each stock in the index is then calculated by dividing the market capitalization of the stock by the total market capitalization of all the stocks in the index.

This means that larger companies with higher market capitalizations have a greater influence on the index than smaller companies. The idea behind this weighting method is that larger companies are generally considered to be more important and influential in the overall economy, and therefore should have a greater impact on the index.

In contrast, price weighting, also known as the equal-dollar weighting method, assigns equal weight to each stock in the index based on its price per share. This means that higher-priced stocks have a greater impact on the index than lower-priced stocks, regardless of the company's size or market capitalization.

Equal weighting, as the name suggests, assigns equal weight to each stock in the index, regardless of its size, market capitalization, or price per share. This method is often used by index funds that aim to provide broad exposure to a particular market or sector.

Base weighting, on the other hand, is a less common method that involves selecting a base period for the index and assigning weights based on the values of the stocks during that period. This method is typically used for historical analysis or to compare the performance of the index over different time periods.

In summary, capitalization weighting, also known as value weighting, is a method of calculating the value of a stock market index based on the market capitalization of each stock in the index. This method assigns greater weight to larger companies, reflecting their greater impact on the overall economy.