How an Index is Constructed

L1 12 How An Index Is Constructed V2

Hang Seng Index

Suppose the Hang Seng Index started at 100 points on its very first day of creation. Let’s also pretend that the total market cap of all fifty companies in the index sums to 100 billion hong kong dollars. On day 2, let’s say the market cap changed to 102 billion. The percent change is
HK\$ 102b / HK\$ 100b = 1.02 or a 2% increase.
Multiply day one’s index value of 100 points by this 2% increase:
100 points \times 1.02 = 102 points
So day two’s index value is 102 points

Market Cap Weighted Index

A market cap weighted index has only two stocks, A and B. On day 1, the index has a value of 100. Stock A has a market cap of 100 million, while stock B has a market cap of $200 million. One month later, stock A has a market cap of $105 million, while stock B has a market cap of $210 million. What is the value of the index?

100

105

110

120

SOLUTION:

105