To determine the weight of a stock in a value-weighted index, which formula is used?

The weight of a stock in a value-weighted index is determined by multiplying the stock's price by the number of outstanding shares. This calculation effectively gives the market capitalization of that specific stock. The total weight of the index reflects the market capitalization of individual stocks relative to the total market capitalization of all stocks in the index.

When assessing stocks in a value-weighted index, it is crucial to recognize that stocks with higher market capitalizations have a greater influence on the index’s performance. Thus, this formula accurately captures the importance of each stock in terms of its overall value in the market.

In contrast, other options either misinterpret the calculation necessary for determining weight or do not align with the principles of how value-weighted indices function. For example, simply dividing price by total market cap does not yield the weight of the stock but rather confuses the fundamental relationship between price and overall company value.