Question

question 5:

5. In the following table. P represents the price at time t, and Q, represents shares outstanding at time t. If the equally weighted index of the three stocks at t=0 was 300, what is the index at t=1? A B C Po Qo P QL 88 100 93 100 45 200 40 200 96 200 48 400 Answer: Show your calculations here.

Answer 1

In an equal weighted index, all the stocks have equal weights irrespective of no. of shares of each stock held. The assumption is portfolio holds same no. of shares of each stock.

First we need to calculate % change in prices from P₀ to P₁.

A = (P₁/P₀) - 1 = (93/88) - 1 = 1.0568 - 1 = 0.0568

B = (40/45) - 1 = 0.8889 - 1 = -0.1111

C = (48/96) - 1 = 0.5 - 1 = -0.5

Net change in price = 0.0568 - 0.1111 - 0.5 = -0.5543

Index at t=1 = index at t=0*(1-Net change in price) = 300*(1-0.5543) = 133.71