Lesson 9 of 12 · All lessons in this module
  1. Money-weighted return
  2. Time-weighted vs money-weighted returnVideo lesson
  3. Which return to report: managers, investors and GIPS
  4. Integrated cases: balance tables, money-weighted and time-weighted returns
  5. What an index is: value, price return and total returnVideo lesson
  6. Index objectives, custom indexes and choosing a version
  7. Building an index: target market, constituents and weighting
  8. Price-weighted and equal-weighted indexesVideo lesson
  9. Market-cap, float-adjusted and fundamental weightingVideo lesson
  10. Rebalancing, reconstitution and what indexes are used for
  11. Rebalancing in shares, weight drift and reconstitution rules
  12. Integrated cases: one market, three weightings and a stock split

This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.

Lesson 9 of 12 · 14 min

Market-cap, float-adjusted and fundamental weighting

Market-cap weighting holds each stock in proportion to its market value, ideally counting only freely tradable shares; fundamental weighting uses size measures that ignore price, which tilts the index towards value stocks and works against momentum.

In short

  • Market-cap (value) weighting: weight = shares outstanding × price ÷ total market cap of all constituents.
  • Float-adjusted market-cap weighting counts only the market float: shares available to the investing public (excluding controlling holders, other companies, governments and, for some global indexes, shares closed to foreigners). Most cap-weighted indexes today are float adjusted.
  • Advantage: securities are held in proportion to their value in the target market. Disadvantage: stocks that have risen most get the biggest weights, a momentum effect that overweights possibly overvalued stocks.
  • Fundamental weighting uses size measures independent of price (book value, cash flow, revenue, earnings, dividends, employees), alone or as a composite.
  • Fundamental indexes have a value tilt and a contrarian effect at rebalancing: stocks with high earnings (book, dividend) yields get more weight than under cap weighting.

Unlock this lesson free for 7 days

Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.

Start your 7-day free trialLog in