An equity fund manager is considering a market index as benchmark for his portfolio and he has the following preferences:
·the index should have a contrarian "effect";
·shares held by controlling shareholders should not be excluded;
·dividends should be included in the weighting of constituent securities; and
·the weights of constituent securities should not be arbitrarily determined by the index provider.
Which of the following weightings of indices best meets the fund manager's preferences?
Fundamental weighting satisfies the fund manager's preferences. Fundamental indices use a single measure, such as total dividends, to weight the constituent securities. Fundamentally weighted indices generally will have a contrarian "effect" in that the portfolio weights will shift away from securities that have increased in relative value and toward securities that have fallen in relative value whenever the portfolio is rebalanced. All shares are included in a fundamental weighted index.