Question
In: Finance
3 . Explain how we calculate the rate of return for a market-value weighted index. You...
3 . Explain how we calculate the rate of return for a market-value weighted index. You can show the formula and explain it.
4. Explain how we calculate the rate of return for an equally-weighted index. You can show the formula and explain it.
Solutions
Expert Solution
Market-value weighted index considers the components of Market Value and Outstanding Shares in it's calculation. This index reflects the daily market value as it changes by the stock price's volatility(High and Low) . Weights here are taken based on the market value while deciding the rate of return.
Formula for Market value weighted index rate of return is Market value weighted index = Number of Shares X Market Price ; we calculate for each company's share in the index, and sum everything to arrive at a Market Value weighted index rate.
Equally weighted Index considers the components of equal stock weights in the index, the weights could be taken any number that can total 100%. Each stock's weight is similar to another irrespective of it's market price.
Formula for Equally weighted index is Level of index of the previous Day X Arithmetic average of of the daily market price in compared to the other stocks.
jeff jeffy answered 2 years agoRelated Solutions
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