Index Investing: From Theory to Practice · Dr MAI Huu Minh, TRAN Phan Bao Ngoc & HUYNH Nguyen Quoc BuuChapter 9 of 37 · Module 3: Index design
CHAPTER 9
Weighting Schemes
How much of each stock goes into the basket
Opening question
“Two Vietnam funds hold exactly the same thirty stocks. Last year one rose 12% and the other 4%. How is that possible?”
In this chapter
- Market-cap and free-float weighting, and why they are the default
- Capping rules: single-stock caps and the 5/10/40 diversification rule
- Equal weighting and fundamental weighting
- Score-tilted and dividend-weighted indexes
- Risk-based weights: inverse volatility, minimum variance and risk parity
- Measuring concentration: top-10 weight, Herfindahl index and the effective number of stocks
- The trade-offs between diversification, turnover and capacity
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This chapter is in the full book
Chapter 1 is free to read online. The full text of chapter 9 — with its tables, figures, worked examples and practice lab — is available in the complete edition of Index Investing: From Theory to Practice (Volume 1, NXW Investment Library).
Read Chapter 1 freeGet the full book — contact@nxw.vnSections of this chapter
9.1 Why weighting matters
9.2 Market-cap and free-float weighting
9.3 Capped weights and the 5/10/40 rule
9.4 Equal weighting
9.5 Fundamental weighting
9.6 Score-tilted and dividend-weighted indexes
9.7 Risk-based weighting
9.8 Measuring concentration
9.9 Capacity and turnover: the price of diversification