Question

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

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

Homework Answers

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 :)

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