Question

The Hydro Index is a price weighted stock index based on the 4 largest boat manufacturers in the nation. Consider the four stocks in the following table. P_t represents price at time t, and Qt represents shares outstanding at time t. (Please pay close attention to stock split)

	P0	Q0	P1	Q1	P2	Q2
A	80	200	90	200	98	200
B	50	300	40	300	50	300
C	90	200	110	200	115	200
D	100	100	90	100	40	300

a.      What must be the divisor for the price- weighted index in year 2?  (Keep your answer to four decimals, such as 2.3456)
b.     What is the price weighted index at t=1 ?  (Keep your answer to only two decimals, such as 81.23)
c.      What is the price weighted index at t=2?  (Keep your answer to only two decimals, such as 81.23)

Answer 1

For price weighte index, divisor changes with stock splits. But, initially the divisor is just the no. of stocks in the index.

So, initial divisor = 3

In year 2, clearly there was a 3 for 1 stock split in Stock D

Now if the stock split has not happened, stock price of D would have been = 40*3 = 120

so, if the stock split has not happened, price weighted average woud have been = (98+50+115+120)/4 = 95.75

so, divisor for the price weighted indec in year 2 = sum of stock prices in year 2 / price weighted average if the stock split had not happened = (98+50+115+40)/95.75 = 3.1645

b. price weighted index at t=1, = (90+40+110+90)/4 = 82.5

c. price weighted index at t=1, = (98+50+115+40)/3.1645 = 95.75

answered by: anonymous