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Anna71 [15]
3 years ago
9

A benchmark market value index is comprised of three stocks. yesterday the three stocks were priced at $12, $20, and $60. the nu

mber of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. if the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index?
Business
1 answer:
Olenka [21]3 years ago
8 0

Answer: The one day rate of return on the stock is 1.49%

We arrive at the answer in the following manner:

First we need to calculate yesterday's and today's index values.

For that we need to find weights of each day based on market capitalization.

Market Capitalization _{ a stock} = Market Price * No .of outstanding shares

The weight of a company in the index is calculated by dividing the market capitalization  of a company by the total market capitalization of all the companies whose shares are a part of the index.

Weight_{Company A} =\frac{Mkt Cap of company A}{Total Market cap}

Then, we multiply the share price of each company with their respective weights and find the total to arrive at the index value for one day.

<u>Yesterday's Index Value</u>

Stock        Price         No. of shares      Mkt Cap  Weight  Weight*Price

A               12               600000        7200000      0.25      2.96 (0.25*12)    

B               20               500000       10000000    0.34      6.85(0.34*20)

C               60               200000       <u>12000000</u>     <u>0.41</u>      <u>24.66  </u>(0.41*60)

Total                                                 29200000     1.00      34.47

We calculate the weight for stock A as follows:

Weight_{A} =\frac{72,00,000}{2,92,00,000} = 0.2466 = 0.25

We calculate the weights of the remaining stocks in a similar manner.

Please note that the sum total of all weights must add up to 1.

The sum total of the last column (Price * Weight) is yesterday's index value.

We repeat the same steps with today's market price to arrive at today's index value.

<u>Today's index Value</u>

Stock        Price   No. of shares       Mkt Cap     Weight    Weight*Price

A               16               600000       96,00,000     0.31        4.95 (0.31*16)    

B               18               500000       90,00,000     0.29       5.23  (0.29*18)

C               62               200000    <u>1,24,00,000</u>     <u>0.40</u>     <u>24.80</u>(0.40*62)

Total                                                3,10,00,000     1.00     34.98

<u>One-day Rate of Return</u>

We can calculate the one day rate of return on the index as follows:

Rate of return = [\frac{(Today's index value - Yesterday's index value}{Yesterday's index value}) * 100

Rate of Return = ( \frac{34.98 - 34.47}{34.47}) * 100

Rate of return = (\frac{0.51}{34.47}) *100

Rate of return = 0.01494 or 1.49%

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