Differentiate between Price Weighted Index, Equal Weighted Index and Capitalization Weighted Index. Give examples for each. Please explain clearly and in detail.
Price Weighted Index:
A stock index in which each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index.
For example, assume that an index contains only two stocks, one priced at $1 and one priced at $10. The $10 stock is weighted nine times higher than the $1 stock. Overall, this means that this index is composed of 90% of the $10 stocks and 10% of $1 stock.
In this case, a change in the value of ...
This posting gives detailed explanation with examples regarding the Price Weighted Index, Equal Weighted Index and Capitalization Weighted Index.