Suppose you need to create a technology stock index. You are not sure if you sho

Question

Suppose you need to create a technology stock index. You are not sure if you should do a market cap

weighted index or a price weighted index. You will use 2 stocks to make this index:

Stock Price Shares Outstanding

AAPL 251 913MM

IBM 125 1,261MM

1) Calculate the weights each stock would have in a cap weighted index.

2) Calculate the weights each stock would have in a price weighted index.

3) Calculate the return of both a cap weighted index and a price weighted index if AAPL returns 5% and

IBM returns 2%

Explanation / Answer

Particulars AAPL IBM Total Stock Price 251 125 376 Shares outstanding 913 1261 2174 Market Capitalization=Price*Stocks 229163 157625 386788 Weight based on cap weighted index=Market Cap/Total Market Cap (A) 0.592 0.408 Weight based on price weighted index=Price/Total Price (B) 0.668 0.332 Return of Cap weighted Index=A*5% and 2% 2.962 0.815 Return of price weighted Index=B*5% and 2% 3.338 0.665

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