Discuss the difference between a price-weighted index and a value-weighted index. Give one example for the price-weighted index and one example for the value-weighted index and discuss any problems/advantages associated with the specific indices.
Discuss the difference between a price-weighted index and a value-weighted index. Give one example for the price-weighted index and one example for the value-weighted index and discuss any problems/advantages associated with the specific indices.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:a) Discuss the difference between a price-weighted index and a value-weighted index.
Give one example for the price-weighted index and one example for the value-weighted
index and discuss any problems/advantages associated with the specific indices.
b) We assume that investors use mean-variance utility: U = E(r) – 0.5 × Ao², where
E(r) is the expected return, A is the risk aversion coefficient and o? is the variance
of returns. Given that the optimal proportion of the risky asset in the complete port-
folio is given by the equation y* = E , where r; is the risk-free rate, E(rp) is
the expected returm of the risky portfolio, o, is variance of returns, and A is the risk
aversion coefficient. For each of the variables on the right side of the equation, discuss
the impact of the variable's effect on y* and why the nature of the relationship makes
sense intuitively. Assume the investor is risk averse.
Ao
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