Question on Index construction only, version, question, positive, percentage

RoastBeef

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

mar350

Oh, that's confusing. Scratch what I said.

I guess, they're not contemplating the scenario that you laid out.

oneboy

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

cityboy

The question said do not worry about any rebalancing.

Roflnadal

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.

NakedPuts2011

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?

thommo77

the last one is C

Analti_Calte

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!