- CFA Exams
- CFA Exam: Level I 2021
- Study Session 12. Equity Investments (1)
- Reading 37. Security Market Indices
- Subject 2. Index Construction and Management

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**CFA Practice Question**

There is a price-weighted market index composed of four stocks. The prices of the four stocks are $123, $143, $43, and $304. Assuming that the price of the $123 stock increased by 9%, by how much would the index change?

B. The index would increase by 1.8%.

C. The index would increase by 2.5%.

A. The index would decrease by 0.2%.

B. The index would increase by 1.8%.

C. The index would increase by 2.5%.

Correct Answer: B

The numerator of the index is simply the sum of the four stock prices. Before the increase in the $123 stock, the numerator would have a value of 613. After the increase, the numerator would have a value of 624.07 ((123 x 1.09) + 143 + 43 + 304 = 624.07). Regardless of what the divisor is, this will result in a 1.8% increase in the index (624.07/613 - 1).

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**User Contributed Comments**
12

User |
Comment |
---|---|

tony1973 |
no the formula is correct. you can also say: (624.07-613)/613. |

vrs3 |
Isn't the formula....624.07-613/613. |

vvenkatr |
You have to assume that the prices of the other three stocks do not change. |

o123 |
...is that really such a difficult assumption? |

eb2568 |
you can also take (123/613) which is .2007 and multiply by .09 and it is .0181. This saves a little time i think. |

uma85 |
Day 1 : 123+143+43+304= 613/4 = 153.25 Day 2 : (123*.09)+143+43+304= 624.07/4 = 156.01 Day to Day % change = (Day 2/ Day 1) - 1 (156.01/153.25) - 1 = .018 or 1.8 % |

DonAnd |
That's exactly the way I did it uma85 |

jonan203 |
vrs3: check your order of operations...you'll get the wrong answer that way. |

Shaan23 |
Do what EB says. Think logically guys. Its PRICE weighted. Look at the weight of the first price and only that one changes. |

enetis |
Or.... weight of stock x %px chg of stock (.2)(.09) = 1.8% |

birdperson |
i got it the way @enetis did |

Inaganti6 |
Why so much chit chat over something so simple. Some of you guys really. |