# Question on Index construction

a rather simple question… in the sample exam version 2, one of the question states that the return on a value weighted index is the percentage change in the total market capitalization of the firms in the index. if a firm issues new shares, the market capitization increases however the stock prices doesn’t go up. so how can return be measured that way? or put differently, if the only thing that changed was the issue of new shares, the return will be positive from using that calculation, but it will be actually zero. please explain

say what? I don’t think they’re saying what you’re writing. They just mean, each firm in the index contributes to the total index return in proportion to its market capitalization. The big take-away is the index’s market-cap weighted… as opposed to the price- and equal-weighted flavors.

what they did was, took the percentage difference between two periods on the market capitalization and called that the return

Oh, that’s confusing. Scratch what I said. I guess, they’re not contemplating the scenario that you laid out.

whystudy or neveruse - can you please post the last 3 answers of sample 2 from Ethics. Somehow I can’t open testrac site today. Thanks

cfaboston, what’s the question and i will give you the answer also, do you understand the qeustion i posted up above?

I won’t be able to explain but I got the answer correct. I tried to calculate all 3 values - Equal was coming around 12.4, value (market weighted) was given and had to find out the value which was like 13.5

cfaboston28 Wrote: ------------------------------------------------------- > I won’t be able to explain but I got the answer > correct. > > I tried to calculate all 3 values - Equal was > coming around 12.4, value (market weighted) was > given and had to find out the value which was like > 13.5 exactly, can you explain that. how would you be able to get 13.5 you would simply just find the % change in the market captalization. but if it’s just the % change, wouldn’t any changes in outstanding shares affect that and thus not reflect the correct return?

The question said do not worry about any rebalancing.

no rebalancing just means the index is not getting reweighted, it doesn’t mean no new shares are issues or bought back! it did say no splits or dividends, but that won’t change it either.

Whystudy - you are overthinking here man. If values are not given, how would you assume and calculate the things which are not asked. Can I get the answer of those 3 questions on GIPS now - Chi Paul posted the explaination but can you post the answers. Are they B, B and B?

the last one is C

thanks

the last one is C the way you could calculate actually is this! take the market cap weight % in the beginning and multiply by the given Price Return. that is essentially the real calculation on the market value weighted. I am anal here and can’t figure it out cause it’s actually somewhat related to my job!