There is contrarian effect in fundamental weighted index and momentum effect in market cap weighted index. Please explain this.
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There is contrarian effect in Fundamental Weighted index , because it’s assigns weights in accordance with the value characteristics of the company like ,P/E ratio ,P/BV ,etc
So, the stocks who have lower P/E ratio are assigned much weightage with the expectations ,it’ll outperform in long term .
Whereas Market Cap Weighted Index assigns weights on the basis of market cap of stocks . Hence , greater weights is assigned to large cap stocks and small weights to small cap stocks . So , it’s based on momentum effect .
Hope it helps !
Got it…thank u!
In fundamental weighted index the weight is given to those whose relative value(P/E, P/BV)etc is low, And weight is given to those whose earnings are higher ,book value higher and the losers are going to win and therefore contrarian . And in market cap the weight is given to those who are going to be future winners whose market capitalisation shares is high therefore momentum effect
Thank u