You Have a Value-Weighted Index Made Up of Two Companies

question 16

Essay

You have a value-weighted index made up of two companies. One company, we will call A, has a stock price of $25 per share and there are 10,000 shares outstanding. The other company, we will call B, has a stock price of $100 per share and has 1000 shares outstanding. What will be the percentage change in the index from a 10% increase in the share price of company A? What will be the percentage change in the index from a 10% increase in the share price of company B?

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Definitions:

Weakening

A term often used to describe a decline in the strength or value of an asset or currency.

Portfolio Investment

Investments in a variety of financial assets, such as stocks, bonds, and commodities, to diversify risks.

Direct Investment

Refers to buying and holding a significant amount of interest in a foreign company or investing in a manner that grants control over the operations and management.

Securities

Securities that signify ownership in a company listed on the stock market, a debt owed by a corporation or government entity (bonds), or entitlements to ownership through options.