Question

14

A benchmark index has three stocks priced at $40, $63, and $73. The number of outstanding shares for each is 435,000 shares, 575,000 shares, and 723,000 shares, respectively. If the market value weighted index was 950 yesterday and the prices changed to $40, $59, and $77 today, what is the new index value?

Multiple Choice

• 945

• 950

• 955

• 940

Answer 1

We will be calculating the total weight of each of the shares-

Total portfolio value at the beginning= (40 x 435000)+ (63 x 575000)+( 73* 723000)

=(174,00,000+362,25,000+52779,000)

=106404,000

Weight of stock A=(174,00,000/1064040000)=16.35%

Weight of stock B= (36225000/106404000)= 34.04%

Weight of stock C=(52779,000/106404000)= 49.60%

Return of stock A = (40-40)/40=0%

Return of stock B= (59-63)/63=-6.34%

Return of stock C= (77-73)/73= +5.479%

Total return of the index= (0*16.35%)+(-6.34*34.04%)+(5.479*49.60%)= (0+2.717-2.158)= .55864%

Value at end of the year of index= 950+(.55864% of 950)= 955

Correct answer will be option (C) 955