(a)
To calculate:
By using the price-weighted index of the five stocks, the monthly return of the five stocks.
Introduction:
The price-weighted index is an average calculated by taking a sum of prices of the stock and then dividing them by a divisor.
Answer to Problem 2WM
The monthly return of the stocks by using price-weighted index average of five stocks is
Explanation of Solution
Given:
The prices of five different stocks on the first and last trading day of the previous month using the data source from www.nasdaq.com are:
Date/Company | Apple | Microsoft Corp. | Facebook Inc. | Vodafone group | Netflix Inc. |
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The return using price-weighted index average can be computed by:
So, by using the above formula, the Price-weighted index at period
So, by using the above formula, the Price-weighted index at period
The return of the stocks by using a price-weighted index average of five stocks:
Thus, the monthly return of the stocks by using a price-weighted index average of five stocks is
(b)
To calculate:
By using the value-weighted index of the five stocks, the monthly return of the five stocks.
Introduction:
The value-weighted index is an average return calculated by equalizing the weighted average of the returns of the stocks with the weights proportional to the market value.
Answer to Problem 2WM
The monthly return of the stocks by using value-weighted index average of five stocks is
Explanation of Solution
Given:
The market values of five different stocks on the first and last trading day of the previous month using the data source from www.nasdaq.com are:
Date/Company | Apple | Microsoft Corp. | Facebook Inc. | Vodafone group | Netflix Inc. |
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The return using price-weighted index average can be computed by:
So, by using the above formula, the Value-weighted index at period
So, by using the above formula, the Value-weighted index at period
The return of the stocks by using a value-weighted index average of five stocks:
Thus, the monthly return of the stocks by using a value-weighted index average of five stocks is
(c)
To explain:
The difference between the two returns computed, by comparing them.
Introduction:
The price-weighted index is based on per share value and the value-weighted index is based on the total value of shares.
Answer to Problem 2WM
The main reason behind the difference between both returns is the multiplier used in computing the index value of both returns.
Explanation of Solution
As compared to both the returns computed above in sub-part a. and b. it can be observed that there is a huge difference in the returns of the both. This difference is due to the multiplier used in calculating the values for computing return.
The multiplier used in the price-weighted index is the price per share which means that more weight age is given to the higher per share value.
The multiplier used in the value-weighted index is the value of total shares i.e. price of a share multiplied with a number of shares (volume) which means that more weight age is given to the higher market value.
Thus, due to the above mentioned reason, the returns in both indexes will be different from each other.
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Chapter 2 Solutions
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