Question

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

Answer 1

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.