Which statement best describes price-weighted indices?

Which statement best describes price-weighted indices?

• A. They adjust the weights to maintain a constant NAV for the index.
• B. They take into account the price of each share but not the size of the company.
• C. They weight stocks by market capitalization to reflect company size.
• D. They provide equal weight to all stocks regardless of price.

Answer: (B)

Price-weighted indices determine each stock’s influence by its share price, not by how large the company is. That means higher-priced shares move the index more, regardless of the company’s overall size. This is why the statement that best describes them is that they take into account the price of each share but not the size of the company. In practice, the index value is calculated using a divisor to control for stock splits and similar adjustments, rather than aiming for a constant net asset value. The other ideas don’t fit: NAV adjustments aren’t the mechanism for price-weighted indices, market-cap weighting uses company size, and equal weighting would treat every stock the same regardless of price.

Price-weighted indices determine each stock’s influence by its share price, not by how large the company is. That means higher-priced shares move the index more, regardless of the company’s overall size. This is why the statement that best describes them is that they take into account the price of each share but not the size of the company. In practice, the index value is calculated using a divisor to control for stock splits and similar adjustments, rather than aiming for a constant net asset value. The other ideas don’t fit: NAV adjustments aren’t the mechanism for price-weighted indices, market-cap weighting uses company size, and equal weighting would treat every stock the same regardless of price.