Question

Three stocks have share prices of $37, $115, and $85 with total market values of $540 million, $490 million, and $290 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?

Answer 1

Answer:

Index Value= 39

Explanation:

Index Value=(37+115+85)/3=39

Answer 2

Answer:

Index value is $79

Explanation:

Index value calculation comes from the prices of the underlying holdings. Most indices have values based on market-cap weighting, revenue-weighting, float-weighting, and fundamental-weighting.

For index calculations, weighted average mathematics is used as values are derived from a weighted average calculation of the value of the total portfolio. As such, price-weighted indexes will be more greatly impacted by changes in holdings with the highest price, market cap weighted indexes will be most greatly impacted by changes in the largest stocks, and so on depending on the weighting characteristics.

Price index = average of share prices

Price index = $\frac{37+115+85}{3}=\frac{237}{3} =79$

Price index = $79