Equal weighting in market indices

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archived_user

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Why does the weighting change on equally weighted securities, surely they should remain at the same level as at inception?
 
The price of GOOG goes up, the price of APPL goes down; tomorrow, their weightings are no longer equal.
 
S2000magician wrote:
The price of GOOG goes up, the price of APPL goes down; tomorrow, their weightings are no longer equal.
Click to expand...
OK, but they are not price weighted so why would the weighting change? Suppose we have equal weighting and GOOG is given a 50% weighting as is APPL. Even if GOOG goes up from $100 to $200 and APPL goes down from $100 to $50, why would their weighting change since it is arbitrarily set at 50%? i.e. it would still be 50% to GOOG and 50% to APPL
 
ayousaf wrote:
S2000magician wrote: The price of GOOG goes up, the price of APPL goes down; tomorrow, their weightings are no longer equal.
Click to expand...
OK, but they are not price weighted so why would the weighting change? Suppose we have equal weighting and GOOG is given a 50% weighting as is APPL. Even if GOOG goes up from $100 to $200 and APPL goes down from $100 to $50, why would their weighting change since it is arbitrarily set at 50%? i.e. it would still be 50% to GOOG and 50% to APPL
Click to expand...
On Monday, the value of the index is $200: one share of GOOG @ $100 (50% of the index), and one share of AAPL @ $100 (50% of the index).
On Tuesday, the value of the index is $250: one share of GOOG @ $200 (80% of the index), and one share of AAPL @ $50 (20% of the index).
Ain’t no longer 50-50.
 
I think the confusion here is in the definition of equally weighted. The name implies that the weights are determined simply by Qty of shares in index e.g. 5 different securities, use of each security to construct the index, hence equally weighted. So it seems like changes in price should have no bearing on the weights.
The formula is quite misleading. w=1/N
wi - fraction of the portfolio that is allocated to security i or weight of security i
N = Number of securities in the index
If you interpret N as the number of different securities in the index, then you get to the confused state outlined above.
If you interpret N as a number that varies to get w * p (where p is the price of security i), then you see where the confusion arises.
 
Atomic_Sheep wrote: I think the confusion here is in the definition of equally weighted. The name implies that the weights are determined simply by Qty of shares in index e.g. 5 different securities, use of each security to construct the index, hence equally weighted. So it seems like changes in price should have no bearing on the weights.
Click to expand...
Equally weighted means having the same market value of each security: $100 of GOOG, $100 of AAPL $100 of MCD, $100 of JNJ, and so on. A change in the price of any security will have a direct bearing on the weights.
 
I edited my above post a bit to elaborate on the problem a bit more. I was very confused about this myself.
 
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