Though the term "price-weighted index" might not be familiar to you, you've probably heard of the Dow Jones Industrial Average, which is the oldest price-weighted index. A price-weighted index gives influence to each of the companies in the index based on its share price, not its total market value. For example, if Company A's stock trades at $90 per share and Company's B's stock trades at $30 per share, Company A's stock is weighted three times as heavily as Company B's. To figure the rate of return, you must know the starting price and ending price for the index for your specific period of time.
Add the stock price of each company in the index at the start of the period. For example, if you want to figure the rate of return for a given year, add the opening stock prices of each company on Jan. 1. Say the index has four stocks that sell for $40, $70, $140 and $150. The total value is $400.
Divide the value of all the stocks by the number of stocks in the index to find the value of the index at the start. In this example, divide $400 by 4 to find the index value is $100.
Add the stock price of each company in the index at the end of the period. For example, if you want to figure the rate of return for a given year, add the closing stock prices of each company on Dec. 31. Say the index has four stocks that sell for $50, $65, $155 and $170. The total value is $440.
Divide the value of all the stocks by the number of stocks in the index to find the value of the index. In this example, divide $440 by 4 to find the index value is $110.
Subtract the starting index value from the ending index value to figure the numerical gain or loss on the investment. In this example, subtract the starting index value of $100 from the ending value of $110 to find it went up by $10.
Divide the gain or loss by the initial value to figure the rate of return for the index. Continuing the example, divide $10 by $100 to get a return rate of 0.1.
Multiply the result by 100 to convert the return rate to a percentage. Finishing the example, multiply 0.1 by 100 to find the rate of return on the price-weighted index is 10 percent.
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