Shares outstanding 5 million 8 million 10 million 20 million do not Price per sh

Question

Shares outstanding 5 million 8 million 10 million 20 million do not Price per share on 8/1 $40 $10 Price per share on 9/1 $20 $25 $10 $25 $40 $20 3 (a) Your fund is an equal-weighted portfolio, holding the same dollar amount of each stock. How many shares of each stock do you hold on 8/1? How should you rebalance (b) Your fund tracks the DJIA index and is thus price-weighted. Answer the same (c) Your fund tracks the S&P index and is thus market capitalization-weighted. Answer (d) In terms of potential transactions costs, which of the three portfolios above is most on 9/1? questions as the above. the same questions as the above. costly to manage?

Explanation / Answer

Ans a)

ans b) Price weighted on 1/8 = (40 + 10 + 20 + 25)/4 = 23.75

Price weighted on 1/9 = (20 + 25 + 10 + 40) = 23.75

There is no change since the values are equal.

Ans c)  

Its index value increased by 21.57%

Ans d) Equal weighted stock index is most coslty to maintain because there is huge transaction cost associated with it.

Equal weighted stock W R E N Number of stock 5 20 10 8 Stock price $   40.00 $   10.00 $   20.00 $   25.00 Rebalanced equal weighted stock W R E N Number of stock 10 8 20 5 Stock price $   20.00 $   25.00 $   10.00 $   40.00

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