CFA Practice Question

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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?

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).

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 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'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.
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