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

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

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

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

IBM returns 2%

Explanation / Answer

in Millions Stock Price Shares O/S Market Cap Weight if Market Cap is used Weight if Price Is taken as base Returns Return in case of Cap Weighted index Return in case of price Weighted index AAPL      251.00              913.00      229,163.00                                       0.59 0.667553191 5% 2.96% 3.34% IBM      125.00          1,261.00      157,625.00                                       0.41 0.332446809 2% 0.82% 0.66%      376.00      386,788.00                                       1.00 1 3.78% 4.00%

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