Question

# Number of shares Closing Prices Company outstanding Year T Year T + 1 W 1,500 \$22.00...

1.  Number of shares Closing Prices Company outstanding Year T Year T + 1 W 1,500 \$22.00 \$18.00 X 2,500 35.00 25.00 Y 2,000 10.00 15.00 Z 3,000 50.00 48.00

Find the percentage change of a value-weighted index consisting of these four stocks from years T to T+1. Round your final answer to four decimals and enter your answer in decimal format (EX: .XXXX)

2. Which of the following is a flaw of price-weighted indices?

 They cannot be adjusted for stock splits The effect a company has on the index is dependent primarily on its price per share. They are biased against high priced stocks. None of the abvove

A value-weighted index is derived by summing the market values of the stocks in the index where: market value = number of shares outstanding x current market value.

Index value at T = 1500 * 22 + 2500 *35 + 2000*10 + 3000*50 = 290500

Index value at T+1 = 1500*18 + 2500* 25 + 2000*15 + 3000 * 48 = 263500

% change in difference = ( Ending value - beginning value ) / beginning value

= ( 263500 - 290500) / 290500 = 27000 / 290500 -1 = -9.29%

Flaw of Price weighted index is :

The effect a company has on the index is dependent primarily on its price per share.

High prices stocks gets higher weight in index and less price stocks gets lower weight in index.

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