Answer: Fundamental

## Explanation The correct answer is **B. Fundamental** weighting. Let's analyze each of the fund manager's preferences against the three weighting methods: ### 1. **Contrarian effect** - **Fundamental weighting**: Has a contrarian effect because it weights companies based on fundamental measures (like sales, cash flow, dividends, book value) rather than market price. When a stock becomes overvalued (high price), its market-cap weight increases but its fundamental weight may not change proportionally, creating a contrarian tilt. - **Equal weighting**: Also has a contrarian effect because it rebalances regularly, selling winners and buying losers. - **Float-adjusted market cap**: Does NOT have a contrarian effect - it's momentum-based (buys more of what's going up). ### 2. **Shares held by controlling shareholders should be included** - **Fundamental weighting**: Typically includes all shares outstanding, not just the free float. - **Float-adjusted market cap**: EXCLUDES shares held by controlling shareholders (uses only free float). - **Equal weighting**: Usually uses all shares outstanding. ### 3. **Dividends should be included in the weighting** - **Fundamental weighting**: Often includes dividends as one of the fundamental factors in weighting. - **Equal weighting**: Ignores dividends in weighting. - **Float-adjusted market cap**: Ignores dividends in weighting. ### 4. **Weights should not be arbitrarily determined by the index provider** - **Fundamental weighting**: Uses objective, rules-based fundamental measures. - **Equal weighting**: Somewhat arbitrary (why equal weight rather than some other scheme?). - **Float-adjusted market cap**: Objective but based on market prices. ### Key Distinction: - **Fundamental weighting** meets ALL four criteria: 1. Contrarian effect ✓ 2. Includes controlling shareholders' shares ✓ 3. Includes dividends in weighting ✓ 4. Not arbitrary (rules-based on fundamentals) ✓ - **Equal weighting** fails on criterion 3 (doesn't include dividends in weighting). - **Float-adjusted market cap** fails on criteria 1 (no contrarian effect), 2 (excludes controlling shareholders), and 3 (doesn't include dividends). Therefore, **fundamental weighting** is the only option that satisfies all of the fund manager's preferences.

Author: LeetQuiz .