Question

1. Suppose a stock index contains the stocks of four firms: W, X, Y, Z. The stock prices for the four companies are $50, $25, $60, and $5, respectively, and the firms have 100 million, 400 million, 200 million, and 50 million shares outstanding, respectively.

a. Calculate the initial value for a price weighted index.

b. Calculate the initial value for a value weighted index.

Answer 1

a. The initial value for a price weighted index is computed as shown below:

= ( $ 50 + $ 25 + $ 60 + $ 5 ) / 4

= 35

b. The initial value for a value weighted index is computed as shown below:

= ( $ 50 x 100 million + $ 25 x 400 million + $ 60 x 200 million + $ 5 x 50 million ) / 4
= $ 6,812.5 million

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