“Value-weighted index could provide a better signal on the market condition to the investors as compared to price-valued index.” Do you agree with this statement? Justify
“Value-weighted index could provide a better signal on the market condition to the investors as compared to price-valued index.” Do you agree with this statement? Justify
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
“Value-weighted index could provide a better signal on the market condition to the investors as compared to price-valued index.” Do you agree with this statement? Justify.
Expert Solution
Step 1
Value -weighted index -Index return equals the weighted average of the return of each component* security which is its weights proportional to outstanding market value i.e., price multiplied by outstanding share. Example of value weighted index is S&P 500.
* component-- stocks that comprise the index is called component.
Price-valued index - Each component of the index is weighted according to its current price. Example of price valued index is Dow Jones Industrial average and Japan's Nikkei
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