**MARKET CAP WEIGHTED INDEX**

**How to Calculate**

ASSUME THE STOCK MARKET HAS ONLY THREE COMPANIES: |
|||

Market Capitalization |
Last Year’s Earnings |
||
---|---|---|---|

Company A = | $6 billion | $100 million | |

Company B = | $3 billion | $300 million | |

Company C = | $1 billion | $200 million | |

Total Market Cap of All Companies |
$10 billion | Total Earnings of All Companies |
$600 million |

MARKET CAP WEIGHTED INDEX |
||

Company A = | $6 billion | = 60% weight in index |

$10 billion | ||

Company B = | $3 billion | = 30% weight in index |

$10 billion | ||

Company C = | $1 billion | = 10% weight in index |

$10 billion |

The market-cap-weighted index, as the name implies, weights companies according to market cap. Here, Company A has a market capitalization of $6 billion which is equal to 60% of the total market cap of all stocks ($10 billion). |

**EQUALLY WEIGHTED INDEX**

*How to Calculate*

ASSUME THE STOCK MARKET HAS ONLY THREE COMPANIES: |
|||

Market Capitalization |
Last Year’s Earnings |
||
---|---|---|---|

Company A = | $6 billion | $100 million | |

Company B = | $3 billion | $300 million | |

Company C = | $1 billion | $200 million | |

Total Market Cap of All Companies |
$10 billion | Total Earnings of All Companies |
$600 million |

EQUALLY WEIGHTED INDEX |
||||

Company A | = | 33% weight in index | ||

Company B | = | 33% weight in index | ||

Company C | = | 33% weight in index |

The equally weighted index weights all companies equally, regardless of size. Here, there are three companies in the stock universe, and therefore each gets a one- third weight in the index. |

**FUNDAMENTALLY WEIGHTED INDEX**

**How to Calculate**

ASSUME THE STOCK MARKET HAS ONLY THREE COMPANIES: |
|||

Market Capitalization |
Last Year’s Earnings |
||
---|---|---|---|

Company A = | $6 billion | $100 million | |

Company B = | $3 billion | $300 million | |

Company C = | $1 billion | $200 million | |

Total Market Cap of All Companies |
$10 billion | Total Earnings of All Companies |
$600 million |

FUNDAMENTALLY WEIGHTED INDEX |
||

Company A = | $100 million | = 16.7% weight in index |

$600 million | ||

Company B = | $300 million | = 50% weight in index |

$600 million | ||

Company C = | $200 million | = 33.3% weight in index |

$600 million |

For the fundamentally weighted index, we used earnings as a measure of economic size. Earnings for the entire universe of companies equaled $600 million, so Company B, with $300 million in earnings, receives a weight of 50% in this fundamentally weighted index. Fundamentally weighted indexes often use additional measures of fundamental size such as cash flow, book value, sales, and/or dividends. Notice that market capitalization (and therefore market price) is not considered for this fundamental index. |

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