CASE C (25 Marks) Karen Thomas has decided to do some investments and develop a portfolio. She has heard about talks of price weighted index and value weighted index and in the link between the Dow Jones Industrial Average (DJ IA) and the overall value weighted market index such as Standard and Poor 500 (S&P 500). Having started to track the variability of the DJIA, she has decided to construct an average or index that will measure the price performance of her portfolio over some time. She has decided to create a price weighted index reflecting their share prices. Her portfolio is based on 10 stocks in her portfolio and is slated to start July 10, 1977 (the base year). The number of shares outstanding has remained constant up to 2011. This means that the closing stock prices will behave similar to closing market values. Given the following data create a spreadsheet to model an index. Stocks hIO'I'IH'IUOW) Questions 1. Prices July July July 10,2013 10.2009 10,1977 45 50 55 12 9 15 37 37 37 65 66 67 36 42 48 26 35 43 75 68 59 35 38 30 67 74 81 84 88 92 The divisor is 1.00 on July 10, 1977, 0.75 on July 10, 2009 and 0.85 on July 10, 2013. Using the data calculate the price weighted index for the portfolio for each of the three dates above for 1977,2009, and 2013. (8 marks) Price weighted indexes such as the DJIA have come under much criticism. One such is that higher priced stocks will impact the portfolio more than lower priced stocks. Assume that stock J increases by 10%. Recalculate the index on each of the three days and comment on your findings. (8 marks) Assume stock J is back to its normal price prior to the increase but increase stock B by 10% and recalculate the index for all three dates. Comment on the findings. Do you agree with the criticism in question 2 of price weighted indexes? Explain