Question

What are examples and advantages of a price-weighted stock index and a market value-weighted stock index?

Answer #1

**Price weighted index**

Price weighted index is calculated by adding the stock price of stocks in the index and dividing it by the number of stocks in the index.

**Advantage**: The computation is simple.

**Example**: Dow Jones Industrial Average (DJIA)
and Nikkei Dow Jones Stock Average.

**Market value-weighted stock index**

Market value-weighted stock index has weights based on the market capitalization of each index stock as a proportion to the total market capitalization of all the stocks in the index.

**Advantage**: Since the weights are based on the
market capitalization, the index stock does not need to be adjusted
when a stock splits or pays a stock dividend.

**Example:** FTSE 100 and S&P
500**.**

I hope that was helpful :)

Explain the difference between Price-Weighted Index and
Value-Weighted Index.

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. Pt 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...

1. When computing a value-weighted index, we use a
"Divisor".
True
False
2. The primary market for stocks is the IPO market, not the
stock market.
True
False
3. An index has a market value of 13,447.25 at the beginning of
the period and 13,893.57 at the end of the period. If you want the
beginning index value to be 2,000, what will be the ending index
value?
a.
2,000
b.
13,893.57
c.
13,447.25
d.
none
ANSWER all or i...

5. A price-weighted index has 3 stocks: A, B and C. Their price
at the start of the index was $35, $48 and $90.
What is the initial divisor if the index start with a value of
100?
By the end of the first year, the price of the 3 stocks is $40,
$52 and $83 respectively. How much has the index gone up?
If stock C has a 3-for-1 split, what would be the new index
value after one...

You own a stock portfolio with market value of $600,000, with a
weighted average beta of 0.87. You want to hedge this portfolio
from price volatility using the E-mini S&P500 index future (ES)
with a price of 50xIndex value.
How many contracts do you need to fully hedge your portfolio if
the 1-mo S&P500 Index is currently priced at 3,477? (round to
the nearest whole number)
If you shorted 2 ES contracts and the index moves to 3,440 in a...

The price-weighted Dow Jones Industrial Average Index closed at
12,500 today and the divisor was 0.14. One of the 30 constituent
stocks had a 5-for-1 stock split right declining from $100 to $20
per share right after the market close (immediately after the index
value and divisor above were observed). What would the new divisor
have to be to keep the index value unchanged at
12,500?
Group of answer choices
1) 0.1320
2) 0.1424
3) 0.1416
4) 0.1336

Which of the following statements regarding value-weighted
indexes is correct?
They are biased in favor of small market capitalization
companies.
They do not automatically adjust for stock splits.
All else being equal, the return for a value weighted index over
a given time period must be greater than the return earned on a
price weighted index.
None of the above
The monthly returns earned on the Dow Jones Total Stock Market
Index tend to be more correlated with the monthly...

A price-weighted index consists of stocks A, B, and C which are
priced at $38, $24, and $26 a share, respectively. The current
index divisor is 2.7. What will the new index divisor be if stock B
undergoes a 3-for-1 stock split? (Round your final answer to four
decimal points.)

You are faced with the probability distribution of the HPR on
the stock market index fund given in Spreadsheet 5.1 of the text.
Suppose the price of a put option on a share of the index fund with
exercise price of $110 and time to expiration of 1 year is $12, and
suppose the risk-free interest rate is 6% per year. You are
contemplating investing $107.55 in a 1-year CD and simultaneously
buying a call option on the stock market...

c) What are the advantages of the single-index model over the
Markowitz model?

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