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098 6. The following stocks are used to construct indexes VINDX, PINDX, and ENDX described below. Current Number of Shares Stock Price Outstanding $10 400 $20 300 $30 100 3000 13,000 /1000 = 13 A) VINDX is a value-weighted index with a current level of 1,000. If A and B increase by 10% and C decreases by 20% what would be the new index level after these price changes? K 4400 6008 B 6600 2400 1020.77 13,400 13400-13000 13,000 3.10% - 1030.77 57-60 B) PINDX is a price-weighted index with a current level of 250. Stock C undergoes a 3-for-1 split before any price change. Then A and B increase by 10% and C decreases by 20%. What will be the new index level? A !! B 22 60 C 24 - 5% C) ENDX is an equal-weighted index. Why is it difficult to maintain this index? Explain by describing what adjustments the index need when A and B increase by 10% and C decreases by 20%. A 10 11 B 20 22 10+ 0 + (-20) c 30 24

Answer 1

6) Current Prices and Shares Outstanding

	Current Price	No of Shares Outstanding
A	$                                             10	400
B	$                                             20	300
C	$                                             30	100

Ans 1) VINDX is a value weight index with current value of 1000

Calculating Current Market Value

	Current Price	No of Shares Outstanding	Current Market Value
A	$                                             10	400	$                               4,000
B	$                                             20	300	$                               6,000
C	$                                             30	100	$                               3,000
			$                             13,000

If the valuation is 13,000 Index value is 1,000.

Now change in valuation - A and B increases by 10% and C decreases by 20%

	Current Price	No of Shares Outstanding	Current Market Value	New Value
A	$                                             10	400	$                               4,000	$      4,400.0
B	$                                             20	300	$                               6,000	$      6,600.0
C	$                                             30	100	$                               3,000	$      2,400.0
			$                             13,000	$        13,400

If the valuation is 13,000 Index value is 1,000. If the valuation is 13,400 Index value would be?

=(1000/13000)*13400 = 1,030.77

Ans 2) PINDX is a price weight index with current level of 250.

	Current Price
A	$                                             10
B	$                                             20
C	$                                             30
Price per share	$                                             20

If the price per share is 20, Index value is 250. Now stock Split in C with 3 for 1 and change in price of stocks.

	Current Price (After Split)	New Price
A	$                                       10.00	$                                       11.00
B	$                                       20.00	$                                       22.00
C	$                                       10.00	$                                         8.00
Price per share	$                                       13.33	$                                       13.67

If the price per share is 20, Index value is 250. If the price per share is 13.33, Index value would be

=(250/20)*13.33 = 166.625

Ans 3) ENDEX is Equal Weigh Index

This is difficult to maintain because prices are getting changed everyday and this index has to change weights accordingly everyday. Such indices increases the task of fund managers

Now we want to invest equally in each company, assuming 300 in each stock and Index value is 900

	Current Price	Equal Weight	No of shares
A	$                                             10	$                                    300.00	30
B	$                                             20	$                                    300.00	15
C	$                                             30	$                                    300.00	10
		Index Value = 900

Now prices changes so weight is no more equal and again need to rearrange the number of stocks

Stocks	Current Price	New Price	Equal Weight	Adjustment with Shares	New Weights
A	$                  10	$            11	$                   300.00	27.27	$                         300
B	$                  20	$            22	$                   300.00	13.64	$                         300
C	$                  30	$            24	$                   300.00	12.50	$                         300
			Index Value = 900		Index Value = 900

Hope this helps.