3. The following table gives the information of the stocks of two prominent Virg

Question

3. The following table gives the information of the stocks of two prominent Virginia compa- nies. Price per share Shares outstanding Blair Systems $40 5 million Ewell Financial $10 8 million (a) The Old Dominion Industrial Average is a DJIA style index covering the stocks of 30 Virginia companies, including the two stocks above. An index fund manager holds a portfolio of the 30 stocks, whose price return tracks the ODIA index return. The portfolio has $1 million of Ewell stocks. How much is the portfolio holding of Blair? (b) The COVA 50 index is a S&P 500 style index covering the stocks of 50 Virginia companies, including the two stocks above. An index fund manager holds a portfolio of the 50 stocks, whose price return tracks the COVA 50 index return. The portfolic has 1000 shares of Blair. How many shares of Ewell must be in the portfolio?

Explanation / Answer

a) DJIA is a price weighted index. So the proportion of amount investe din stock will be proportional to price of the stocks.
So if there is a $1 million Ewell stocks, there would be $4 million Blair stocks as Blair is 4 times the price of Ewell. Hence 4 million is the answer.

b) S&P is a capitalization weighted index. Market cap is price times no of shares:

Hence there shall be 400 Ewell shares

Blair Ewell Price $    40.00 $    10.00 Shares(millions) 5 8 Market cap $ 200.00 $    80.00 Percentage           0.71           0.29 No of shares 1000 400

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