what is the weighted average market capitalization 
the weighted average market capitalization refers to a type of stock market index construction that is based on the market capitalization of the index s constituent stocks large companies would therefore account for a greater portion of an index than smaller stocks this means the movement of an index would depend on a small set of stocks the most well known market capitalization weight index is the s p 500 which tracks the 500 largest assets by market capitalization the top four holdings combine for over 10 of the entire index these include apple aapl microsoft msft amazon amzn and meta formerly facebook meta 1 the s p 500 is widely considered a gauge of the strength of the broader market and a benchmark for performance understanding the weighted average market capitalizationthe weighted average market capitalization is determined by multiplying the current market price by the number of outstanding shares and then taking an average to determine the weighting for example if a company s market capitalization is 1 million and the market capitalization of all stocks in the index is 100 million the company would represent 1 of the index morningstar calculates the metric by taking a geometric mean of the market capitalization of the stocks in a fund whereas other providers use an arithmetic mean 2some investors believe a weighted average market capitalization is the optimal method of asset allocation as it reflects the actual behavior of markets this way larger companies tend to have a greater influence over the index just as is the case in the s p 500 this leads to a natural rebalancing mechanism where growing companies are admitted to the index and shrinking ones become excluded investors also believe the methodology causes less risk because a larger proportion of the fund is allocated to stable companies but there are some limitations to the strategy when small cap stocks outperform larger ones as they have for most of history there are fewer opportunities for index investors to gain lofty returns meanwhile market cap weighted indexes like the s p 500 give off the appearance of diversification but a few stocks dictate a larger portion of the movement this represents a big bet that the efficient market hypothesis holds through bull and bear markets the efficient market hypothesis says that stock prices reflect all information available and trade at fair market value on all exchanges alternatives to weighted average market capitalizationalternative methods of asset allocation include price weighting and equal market cap weighting among many more the holdings of a price weighted index are determined by a simple mathematical average of several stock prices the dow jones industrial average is perhaps the most well known index that employs price weighting 3in contrast an equal weighted index gives the same weight to each stock in a portfolio or fund for example the s p 500 equal weight index is the equal weighted version of the popular market cap weighted s p 500 4