A:

A capitalization-weighted index, or market value-weighted index, is a stock market index with individual components weighted according to their market capitalization. A capitalization-weighted index is computed by adding all of the market capitalizations of the components and then dividing by an arbitrary number determined when the index comes into existence.

For example, suppose a capitalization-weighted index ZYXWV comprises five public companies. Company Z has a market capitalization of $50 million and 5 million shares outstanding. Company Y has a market capitalization of $30 million and 1 million shares outstanding. Company X has a market capitalization of $20 million and 500,000 shares outstanding. Company W has a market capitalization of $25 million and 1 million shares outstanding. Company V has a market capitalization of $100 million and 5 million shares outstanding.

Each component should have a different weight based on the size of its market capitalization. The percent each component should be weighted is calculated by dividing each individual market capitalization by the sum of all of the index components' market capitalizations. Company Z has a weight of 22.22%, or $50 million / $225 million. Company Y has a weight of 13.33%, Company X has a weight of 8.9%, Company W has a weight of 11.11%, and Company V has a weight of 44.44%.

The component with a higher market capitalization has a higher weight in a capitalization-weighted index. The divisor given for index ZYXWV is 225,000, and the index opens with a value of 1,000, or 225 million / 225,000.

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