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KIC000007 - Construction oflndexes Construction of Indexes...

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Construction oflndexes How are stocks weighted? In a price-weighted index, the average share price of the firms is being measured at each point in time. - Stocks with h ~r: prices affect the index more - Events such as st • splits \\<1U reduce a flrm S weight In the index In a vafue-weigbted index, the total market value of the firms is being measured at each point in time. - Increase in total economic value is more relevant than just price - A percent change in the value of a large firm has a greeter effect:on the index than an equal change in the value of I small firm In an equal-weigbted index, the percent returns are just averaged, regardless ofunderiying share price 0Afit;q1size. - This also represents the return achieved on an equal LJD1\.O r investmem in each security Construction ofIndexes: Example The price weighted index started at $30 + $80 = $110. It ended at $39 + $t40 = $179. The percent change is found 111:\- uo '1 J ::: LPt. ./ 0 a 110 Note the average initial price was $110/2 = $55. The average ending price was $179/2 = $89.5. The percent change is still ~.'S -56 _ 1112"olo 55 as Construction oflndexes: Example What is the return on an equal-weighted index? To find this, we simply average the two individual returns. The return on the
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KIC000007 - Construction oflndexes Construction of Indexes...

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