Explanation

A value-weighted equity index (also known as a market capitalization-weighted index) is constructed by weighting each stock according to its total market capitalization (price per share × number of shares outstanding). Therefore, stocks with larger market capitalizations have a greater influence on the index's movements.

Let's analyze each option:

Option A: has a high price - This is incorrect because a high stock price alone doesn't necessarily mean a large market capitalization. A company could have a high stock price but few shares outstanding, resulting in a small market capitalization.

Option B: splits frequently - This is incorrect because stock splits don't change a company's market capitalization. When a stock splits, the price decreases proportionally while the number of shares increases proportionally, leaving the total market value unchanged.

Option C: has a large market capitalization - This is CORRECT. In a value-weighted index, stocks with larger market capitalizations have greater weight and therefore exert more influence on the index's performance. This creates a bias toward large-cap stocks, meaning the index is more sensitive to price movements of companies with large market capitalizations.

Key Concept:

• Value-weighted index = Market capitalization-weighted index
• Weight calculation: (Stock price × Number of shares outstanding) ÷ (Total market capitalization of all index stocks)
• Bias: Naturally overweights large-cap stocks and underweights small-cap stocks
• Examples: S&P 500, NASDAQ Composite, FTSE 100

This bias is an inherent characteristic of value-weighted indices and is actually their defining feature, not necessarily a flaw unless one is trying to achieve equal representation of all companies regardless of size.