Consider a value-weighted market index that includes the following two companies
ID: 2798064 • Letter: C
Question
Consider a value-weighted market index that includes the following two companies. You form a portfolio to mimic the index. On Day 1 the portfolio has weights which are equal to the value of each company's shares relative to the total value of both companies. Answer the questions that follow.
Company 1
Company 2
Day
Price
# of Shares
Price
# of Shares
1
$8
nbsp 600
$10
2,000
2
$8.96
nbsp 600
$10.10
2,000
a. What is the portfolio weight for Company 1 on Day 1?
b. What is the return on the portfolio from Day 1 to Day 2?
c. What is the percentage change in the total value of the stocks in the index from Day 1 to day 2?
a. What is the portfolio weight for Company 1 on Day 1? The portfolio weight for Company 1 on Day 1 is
nothing%.
(Round to two decimal places.)b. What is the return on the portfolio from Day 1 to Day 2? The return on the portfolio from Day 1 to Day 2 is
nothing%.
(Round to two decimal places.)c. What is the percentage change in the total value of the stocks in the index from Day 1 to day 2? The percentage change is
nothing%.
(Round to two decimal places.)
Company 1
Company 2
Day
Price
# of Shares
Price
# of Shares
1
$8
nbsp 600
$10
2,000
2
$8.96
nbsp 600
$10.10
2,000
Explanation / Answer
a) Portfolio Weight of Company 1 = (8 x 600) / (8 x 600 + 10 x 2,000) = 19.35%
b) Return on portfolio = (8.96 x 600 + 10.10 x 2,000) / (8 x 600 + 10 x 2,000) - 1 = 3.129%
c) % Change in total value of index = 3.129%