Equity Portfolio Management - Goldsboro

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MrSmart

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Question 1:
Based on Exhibit 1, for the year 2009, assuming no stock splits or stock dividends for the stock components and no rebalancing, which of these index structures would have most likely resulted in the largest return for the GSI?
  • An equal-weighted index
  • A price-weighted index
  • A value-weighted index
Why is it C) and not A)?
 
I think for equal it’s sum of the 5 price changes/5 = 12.4%
And the value is 178.2/157-1 = 13.5%
 
I don’t think there is an intuitive answer to this one. You’re going to have to calculate the returns yourself. They give you market-cap in their answer which is 13.5% = (178.2 - 157)/157.
Equal weight would be sum of (change in price * 0.2). (7.7% + 17.90% + 14.30% + 11.60% + 10.50%) * 0.20 = 12.4%
EDIT: ^Beat me to it.
 
I remember it being for the value, not the price.
 
Hello
In fact the answer is, in a way, probably discutable.
One important thing is that indexes are not investables.
On an index point of view, the CW resulted in the highstest variation. CFAI ask for the largest index variation and it seems right.
However, from an investor point of view, I guess, total return (with no dividend) point of view, the final result is quite different => assuming the investor portfolio at t=0 waw composed of the stocks according to the various weighting schemes.
Assuming we are searching for the best weighting scheme at t=0 that maximize the index return over 1y.
At t=1 year, index return should be equal to sum(i =1 to 5) wi*Ri where wi is the weight of the stock i and Ri the price return (no dividend) over the year.
That leads to the following :
https://drive.google.com/open?id=0B6u6z0y3Wc_QNmhkN3N5Qk9iQW8
Eventually the best weighting schemes should be EW>PW>CW, again from an investor, at t=0, putting money in the five stocks.
 
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