Question

# The four stocks below are part of an index. Use the information below: a. Compute a...

The four stocks below are part of an index. Use the information below: a. Compute a price-weighted index by adding their prices at time t and time t 1 1. What is the percentage change in the index? b. Compute a value-weighted index by adding their market values at time t and time t 1 1. What is the percentage change in the index? c. Why is there a difference between your answers to (a) and (b)? # OF SHARES PRICE AT PRICE AT STOCK OUTSTANDING TIME (t ) TIME ( t 1 1) Eeny 100 10 15 Meeny 50 20 22 Miney 50 30 28 Moe 20 40 42

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1. Price weight index at time t = (10+20+30+40)/4 =25 At t+1 = (15+22+28+42)/4 =107/4 =26.9 Percentage change in index = (26.9-25)/25 =7.6%

2. At time t= ((100×10)+(50×20)+(50×30)+(20×40))/(100+50+50+20) =4300/120 =35.84 At t+1 time =((100×15)+(50×22)+(50×28)+(20×42))/(100+50+50+20)) =40.33 % change = (40.85-35.84)/35.84 =12.53%

3 Difference is because of in value weighted index we are taking market capitalization of the stocks movement and in price weighted index we are taking only price movement.

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