Question

Three stocks have share prices of $12, $75, and $30, and havetotal market values of $400 million, $350 million, and $150 million, respectively. A) If you were to construct a price-weighted index of the three stocks, what would be the index value

Answer 1

39

Step-by-step explanation:

A price-weighted index can be described as a stock index in which the fraction of each company included in the index in the total index is proportional to each company’s stock price per share. Therefore, the higher the stock price per share of a company, the greater its effect on the performance of the index. Conversely, the lower the stock price per share of a company, the lower its effect on the performance of the index.

The price-weighted index is calculated as the sum of the price of each stock in the index divided by the total number of companies being considered in the index.

For this question, the index value for the price-weighted index can therefore be calculated as follows:

Index value = (12 + 75 + 30) ÷ 3 = 39

Therefore, the index value is 39.