Fundamental Weighting
An index is composed of stocks that each have the same market value, share price, and return on equity. A fundamental weighting is used for the index, with low market value to book value (MV/BV) stocks given larger weights than high MV/BV stocks. It is _most likely_ that this index will:
Incorrect.
Consider that a price-weighted index will weight each asset equally since they all have the same prices, but there is a difference in their performance given that they have the same return on equity and differing market value to book value ratios.
Incorrect.
Consider that a market capitalization-weighted index will weight each asset equally since they all have the same prices, but there is a difference in their performance given that they have the same return on equity and differing market value to book value ratios.
That's right!
This index captured exactly the bias that it was meant to capture. If all stocks are of equal market value, but have differing MV/BV ratios, then it must be true that those stocks with higher levels of book equity both provided higher returns due to the constant return on equity, and have a lower MV/BV ratio. Therefore this fundamental weighting in favor of the low MV/BV stocks was successful in capturing these higher returns.
Also, because all stocks in the index have the same share prices and market capitalization, the other three weighting styles work identically.
outperform an equal-weighted index of the same stocks.
underperform a price-weighted index of the same stocks.
underperform a market capitalization-weighted index of the same stocks.