Consider an index weighted equally between Stock 1 and Stock 2. If the index starts equally weighted and Stock 1 has a 6% return and Stock 2 has a 2% return, which one of the following is correct?
A. The index weights update automatically as the market prices fluctuate.
B. To restore equal weights, 0.96% of the index must turn over, which is efficient from the standpoint of transactions costs and taxable capital gains.
C. To restore equal weights, 0.96% of the index must turn over, which is inefficient from the standpoint of transactions costs and taxable capital gains.
D. To restore equal weights, 2.00% of the index must turn over, which is efficient from the standpoint of transactions costs and taxable capital gains.
E. To restore equal weights, 2.00% of the index must turn over, which is inefficient from the standpoint of transactions costs and taxable capital gains.
F. To restore equal weights, 4.00% of the index must turn over, which is efficient from the standpoint of transactions costs and taxable capital gains.
G. To restore equal weights, 4.00% of the index must turn over, which is inefficient from the standpoint of transactions costs and taxable capital gains.

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B To restore equal weights 096 of the index must tur... View the full answer