CFAI text states this: “even if pricing errors are random, the largest-cap stocks are more likely to incorporate positive pricing errors than negative pricing errors”
Can someone help me understand this statement? Thanks.
Value = Market Cap of the stock.
Usually the highest value weighted stock would either have high market capitalization due to a. larger # of Shares b. Higher price per share or c. both
Once a particular stock has the highest Value Weight in the index - since stock issuances are a relative rare phenomenon - if the same stock has a higher value weight the next time the index is picked up - the price should have gone up.
S2000 - Please confirm if my understanding is right.
large-marketcap companies in the index more often than not are overpriced i.e. their price is higher than fundamental value might suggest . People do not fear bankruptcy for larger-cap companies and are willing to bid-up their prices for their relative safety.
Large companies which are mature ( i.e. pay dividends steadily ) would generally not be bid lower than their fair value because a large percentage of investing public would immediately gobble them up as they are perceived to be less risky.
If large-cap stocks do have a pricing error it is likely positive