Question

Assume that a market comprises four stocks: Monash, Deakin, La Trobe and Flinders. Current information about each of these stocks is provided in the table below:

	Monash	Deakin	La Trobe	Flinders
Price at time t	$20	$12	$8	$6
Number of Shares on Issue (mill)	1500	800	600	400
Market Capitalisation ($ mill)	$30,000	$9,600	$4,800	$2,400
Price at time t+1	$21	$13	$6	$6

You are developing a new index fund with $2 million to invest.

1. Calculate the number of stocks you would need to buy for each company to construct the following indices;
   • Value-weighted
   • Equal-weighted
   • Price-weighted

Calculate the returns in the year to t+1 for each of the three indices constructed above

Answer 1

		Monash	Deakin	La Trobe	Flinders
	Price at time t	$20	$12	$8	$6
	Number of Shares on Issue (mill)	1500	800	600	400
	Market Capitalisation ($ mill)	$30,000	$9,600	$4,800	$2,400
	Price at time t+1	$21	$13	$6	$6
a)	Value weighted index
		Monash	Deakin	La Trobe	Flinders	Total
	Market Capitalisation ($ mill)	$30,000	$9,600	$4,800	$2,400	$46,800
	Total fund to be invested	2000000	2000000	2000000	2000000
	Amount	1,282,051	410,256	205,128	102,564
	No. of stocks	64103	34188	25641	17094
b)	Equal weighted index
	Invest 500,000 in each stock
		Monash	Deakin	La Trobe	Flinders
	No. of stocks	25,000.00	41,666.67	62,500.00	83,333.33
c)	Price weighted index
		Monash	Deakin	La Trobe	Flinders	Total
	Price	$20	$12	$8	$6	$46
	Total fund to be invested	2000000	2000000	2000000	2000000
	Amount	869,565	521,739	347,826	260,870
	No. of stocks	43478	43478	43478	43478
d)	Returns	t	t+1	Return
	Value weighted index	2000000	2047008.5	2.35%
	Equal weighted	2000000	1941666.7	-2.92%
	Price weighted	2000000	2000000	0.00%