Problem:
Suppose you need to create a technology stock index. You are not sure if you should do a market cap weighted index or a price weighted index. You will use 2 stocks to make this index:
Stock Price Shares Outstanding
AAPL 251 913MM
IBM 125 1,261MM
1) Calculate the weights each stock would have in a cap weighted index.
2) Calculate the weights each stock would have in a price weighted index.
3) Calculate the return of both a cap weighted index and a price weighted index if AAPL returns 5% and IBM returns 2%. Please present complete computation and also provide full description.