Chartered Financial Analyst (CFA) Level 3 Practice Exam

In the context of an equal-weighted index prior to rebalancing, calculating the return involves considering the price changes of all the constituent companies equally, regardless of their market capitalization. This means that, rather than weighting returns based on the size of each company, each company contributes equally to the overall return.

As a result, the return of an equal-weighted index is derived from the average of the price changes of the companies included in the index. This method reflects how each stock, regardless of its size or market influence, impacts the overall index return equally. This characteristic of equal-weighted indices often leads them to show different performance characteristics compared to market-cap-weighted indices, especially in rapidly changing market conditions.

The focus on price changes highlights the direct movement and performance of stock prices, which is fundamental in assessing the overall performance of the index before any adjustments or rebalancing are made.