Question
In: Finance
Consider the following three stocks that constitute a stock market index. Stock Beginning Price Ending Price...
Consider the following three stocks that constitute a stock market index.
|
Stock |
Beginning Price |
Ending Price |
# Shares (000s) |
|
X |
25 |
27 |
10,000 |
|
Y |
100 |
140 |
1,000 |
|
Z |
1500 |
1700 |
200 |
Market-cap-weighted index and price-weighted indexes would be most sensitive to which of these stocks and why?
Solutions
Expert Solution
Price weighted index-
Price weighted index is a kind of index that does not give any weight to outstanding share. it just give weight to the higher price, so since the stock Z price is highest, the price weighted index would be most sensitive to do any movement in stock Z
The weight of Z would be highest in the price weighted index since the stock price is highest among the all three stocks which is 1700.
Market Cap weighted index-
This type of index accounts for( share price multiplied by the number of outstanding share) so, this type of index is based upon the market capitalisation weights of different stocks.
So after putting into the formula stock Z has the highest weights among all three according to share price multiplied by the number of outstanding share.
Which is equal to X= (27*10,000)= 270,000
Y= (140*1000)= 140,000
Z= (1700*200)=340,000
So according to market capitalisation index, It would be most sensitive to movement in stock Z.
jeff jeffy answered 1 year agoRelated Solutions
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