2011 PM mock question 19
Since the change in each stock price is different than the change in market cap, it seems like stocks are being issued/repurchased. Now how is it that we calculate the value of the index based on the change in market cap.
Assume all stock prices were constant during the period. If a company issued stock, the market cap of the stock goes up, and thus so does the index. However a person who was holding all stocks in a proportion equal to their market value does not realize any gain. The index will go up due to the stock issuing even though there was no real gains in the market?
Value weighted index self rebalances for splits, reverse-splits, dividends and earnings. You got a point, that if company increases market cap by issuing new equity we need to rebalance since weight of the stock increases in the index.
When company issues new stock the market cap goes up, however, price of the stock will not be affected. Index price is affected due to the change in market cap, i.e., stock weight, and hence the need to rebalance.
okay but it did not seem they rebalnced here? the considered the change in market cap, while the more relevant one is the gains of the stocks?
seen this question today. for the equal weighted calculation should i be putting 20% weight on each of the price changes or on the market cap changes?
as far as i know, equal weights is same investment in each, so just sum the averages and devide by n
Ok, but do i sum the price changes or do i sum the market cap returns? bit confusing because the price changes did not reflect the market cap changes.
I would do the price changes. Check in CFA Level I books and tell us about this whole market cap issue. I think in Level one they explained this issue more.
I lent my books to someone and he di dnot return them