You Have a Price-Weighted Index Made Up of Two Stocks

question 97

Essay

You have a price-weighted index made up of two stocks, A and
B.The price of A equals $30 and the price of B equals $70.What is the current value of this index? Also, what will be the percentage change in the index resulting from a 10% increase only in the price of A? A 10% increase only in the price of B?
The current value of the index is 50.This is determined by taking the current stock prices and dividing by two, similar to the construction of the DJIA.If the price of A increases by 10% this raises A's price to $33 and the value of the index to 51.5, or an increase of 3%.If only the price of stock B increases by 10%, the price of B will rise to $77, and the index will have a value of 53.5, or an increase of 7%.

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