A popular value-weighted index is constructed out of shares in the two companies shown in the table,below.On Day 1 you construct a portfolio that mimics the index.In order for your portfolio to earn the same return as the index from Day 2 to Day 3,what portfolio weight do you need for Company 1 on Day 2?

A) 12%
B) 13%
C) 14%
D) 15%
E) 16%

Question

A popular value-weighted index is constructed out of shares in the two companies shown in the table,below.On Day 1 you construct a portfolio that mimics the index.In order for your portfolio to earn the same return as the index from Day 2 to Day 3,what portfolio weight do you need for Company 1 on Day 2?
A popular value-weighted index is constructed out of shares in the two companies shown in the table,below.On Day 1 you construct a portfolio that mimics the index.In order for your portfolio to earn the same return as the index from Day 2 to Day 3,what portfolio weight do you need for Company 1 on Day 2? A) 12% B) 13% C) 14% D) 15% E) 16%

A) 12% 
B) 13% 
C) 14% 
D) 15% 
E) 16%

Quizplus · Accepted Answer

Value of Company 1 on Day 2 = $7.53 × 400 = $3,012 Value of Company 2 on Day 2 = $10.54 × 1,500 = $15,810 Total Value on Day 2 = $3,012 + $15,810 = $18,822 w_i = 11ea7fdb_fc07_8d70_a768_f3a032a4ddc8_TB2902_11 The weight of Company 1 = 11ea7fdb_fc07_8d71_a768_d5725ccfa981_TB2902_11 = 0.16 or 16% The weight of Company 2 = 11ea7fdb_fc07_8d72_a768_432cbbb65c16_TB2902_11 = 0.84 or 84%

A Popular Value-Weighted Index Is Constructed Out of Shares in the Two