What is the performance representation of an equal-weighted index?

An equal-weighted index represents the performance of an investment strategy where each component stock is given the same weight in the index, regardless of its market capitalization. This is achieved by investing the same amount of money into each stock within the index, thereby ensuring that every stock contributes equally to the overall performance of the index.

This method can provide a different perspective on market performance compared to market-weighted indices, where larger companies have a more significant influence on the index’s performance. Investing equally in all components can lead to different return profiles, particularly in periods when smaller or less established companies outperform larger firms.

Other options do not align with the principle of equal weighting. For example, combining market-weighted stocks involves considering the sizes of the companies based on their market capitalization, which is not applicable in an equal-weighted index. Similarly, investing based on share prices does not reflect the approach taken by an equal-weighted index, as it focuses on equal investment rather than price levels. Lastly, only considering small-cap companies is not a characteristic of equal-weighted indices, which can contain stocks of various sizes, maintaining equal investment regardless of capitalization.