Tuesday, April 04, 2017 1:13:01 PM
Weight Cap Limitation
Weight caps have been placed on index constituent shares, in order to limit the impact of a single share in an index. A weight cap has been set for each index. In practice, if after the constituent shares are weighted according to the original data, the weight of one or more shares exceeds the cap set for the index, the calculation will be adjusted so as to bring the weight down to the weight cap. The mechanism which adjusts (lowers) the "original" weight of a share to the weight cap is called the weight cap factor. This factor is used to calculate the actual weight of shares in the index.
The weight cap factor is one of the parameters in the equation used in index rebalancing, which adjusts the weight of the most highly capitalized shares in an index to the weight cap set for the index.
For example, if indices did not have a weight cap imposed on them – the "original" weight of Teva Pharmaceuticals would be particularly high (as a result of the large free float value). In order to limit its weight, the original weight is adjusted by the weight cap factor.
The factor is calculated for each share in the index on a monthly basis (synchronized with monthly updates of IANS and free float for rebalancing). When the "original" weight is higher than weight cap – the factor will be less than 1.
http://www.tase.co.il/Eng/PublicationsandEducation/FAQ/FAQ_Indices/Pages/FAQ.aspx
My posts are my opinion and should not be used as investment advice. Make your own decisions in your stock trades.
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