Unit-5 Market Index - SEcurity PDF

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Market Index Theoretical Questions 1. What are different methods of market index calculation? How many indices does NEPSE compute and what are they? 2. Security market index is regarded as an indicator of reflection of entire economy of the nation. Critically subscribe your views in this statement in the context of Nepal. Problem 1 Consider four stocks: Himalayan Bank, Nepal Lever Limited, Jyoti Spinning Mills, and Soaltee Hotel Limited. Their closing prices are given below: Company Himalayan Bank Nepal lever limited Jyoti Spinning Mills Soaltee Hotel Limited

No. of listed shares 1,000 920 1,500 500

Closing price 2050/12/18 Rs.1,700 Rs.1,500 Rs.80 Rs.75

Closing price 2063/12/19 Rs.1,600 Rs.1,550 Rs.75 Rs.60

Closing price 2063 /12/ 20 Rs.1,650 Rs.1,600 Rs.79 Rs.65

Construct an index for 2063 /12 /20, as per the value weighted method, using 2050 /12/18 as the base date, and a base index value of 100. Ans. 101.095

Problem 2 Nepal stock exchange (NEPSE) is only the secondary market in Nepal. In this context, consider the following four stocks listed in Nepal Stock Exchange and their closing prices. Stocks’ symbol HBL CHP SHL NLIC

No. of listed Shares 8,500 4,250 7,500 9,000

2050/05/30 Rs.525 Rs.600 Rs.80 Rs.955

Closing prices on 2073/05/30 Rs.1,600 Rs.1,450 Rs.475 Rs.1,860

2073 /05/ 31 Rs.580 Rs.680 Rs.1,550 Rs.1,765

a. Why is market index constructed? Explain the sensitive index and float index. b. Construct the value weighted index for 2073 /05 /30 and that of 2073/05/31 as per the value weighted method, using 2050/05/30 as the base date, and a base index value of 100. c. Also compute return on index from 2073/05/30 to 2073/05/31. d. Suppose on 2073/05/31 if NLIC listed 20 percent bonus shares (ie.,1,800 units). How will you adjust the base value for additional listing? Also give the significance of this revised base value. Problem 3 Consider the following prices of three stocks for three trading days. Stocks A B C

Price on day 1 Rs. 120 250 80

Price on day 2 Rs. 125 248 84 Page 1 of 3

Price on day 3 Rs. 70 249 85

a. Compute the price weighted index of day 1 and day 2. b. Suppose at the end of day 2, stock A splits two for one, find the revised divisor and give its significance. c. Compute the price weighted index of day 3. Problem 4 Consider the following prices of three stocks for three trading days. Stocks Price on day 1 Price on day 2 Price on day 3 X Rs. 520 Rs. 555 Rs. 750 Y 350 348 350 Z 180 184 160 a. Compute the price weighted index of day 1 and day 2. b. Suppose at the end of day 2, stock Z provided 20 percent stock dividend, find the revised divisor and give its significance. c. Compute the price weighted index of day 3. Problem 5 Consider an equal – weighted market index composed of three securities. The market prices of those securities on three dates are shown below. Market prices Security

Date 1

Date 2

Date 3

A

Rs.50

Rs.55

Rs.60

B

30

28

30

C

70

75

73

a. What is the return on the index from date 1 to date 2? b. What is the return on the index from date 2 to date 3? Ans. a. 3.5% b. 4.52%

Problem 6 Consider a market index based on three securities and their associated prices on three dates. Market prices

If the index's value is 200 on date 2 and date 3 if the index geometric mean basis. Ans. 207.60 and 219.63

Security

Date 1

Date 2

Date 3

L

Rs.20

Rs.23

Rs.30

M

27

30

31

N

40

35

29

date1, calculate its value on return is computed on a

Problem 7 Consider the following four stocks data. Stock

Prices at the beg of the week

Prices at the end of the week Page 2 of 3

s A 250 B 270 300 C 790 780 D 1030 1020 At the beginning of the week the price weighted index was 720 and it increased to 732.31 over the week. The divisor has not changed over the week. What should be the price of stock A at the end of the week? Ans. 280

Problem 8 Consider the following four stocks data applicable for price weighted index. Stocks CHP SBL OHL BPC CIT

Prices at the beg of the year

Prices at the end of the year

1,380 1,550 850 890 600 580 1,430 ? 4,090 6,035 At the beginning of the year the price weighted index was 5,000 and it increased to 6,500 over the year. However the divisor has not changed over the year. What should be the price of stock “BPC” at the end of the year?

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