Question

Today stocks of GM and JNJ are trading at $20 and $60 respectively. The number of outstanding shares of GM and JNJ are 2 Billion and 3 Billion respectively. You implement a value weighted portfolio of GM and JNJ stocks using your savings of $12,000 at today’s prices. Therefore the number of GM and JNJ shares in your portfolio today is:

Answer 1

In a value weighted portfolio, weight of a stock is calculated based market cap of the stock.

So, market cap of GM = price * shares outstanding = 20*2 = $40 billion

similarly market cap of JNJ = 60*3 = $180 billion

So, weight of GM = 40/(180+40) = 18.18%

weight of JNJ = 180/(180+40) = 81.82%

So, amount invested in GM = 18.18% of 12000 = $2181.81

And amount invested in JNJ = 81.82% of 12000 = $9818.18

Number of shares of GM in portfolio = 2181.81/20 = 109.09 shares

Number of shares of JNJ in portfolio = 9818.18/60 = 163.64 share