Q&A: Suppose there is a value-weighted market index...

composed of 100 shares of stock A selling for $100, and 2000 shares of stock B selling for $25. What's the rate of return if stock A increases by 10%, and B increases by 20%?

  • the new market value = 100*(1+10%)*100 + 25*(1+20%)*2000 = 71000
  • RoR = (71000-60000)/60000 = 18.3%

Bonus Points

  • A value-weighted market index is generated by deriving the initial total market value of all stocks used in the series. The importance of individual stocks in the sample depends on the market value of the stocks. There is an automatic adjustment for stock splits and other capital changes in this series.
    • Standard & Poor's 500 Composite Index: based upon 500 firms from NYSE and OTC. The number of stocks in the index is different. The source of the sample is also different. However, the index does not reflect cash dividends paid out by those firms.
    • NASDAQ Composite: Based on almost 5,000 OTC firms.
    • Amex Market Value
  • Firms with large market value have greater impact on the index than firms with small market value. Thus, over time the large market value stocks will dominate changes in a market-value-weighted series.

Category: C++ Quant > Financial Markets

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