Market Index

Problem 1
Consider four stocks and their closing prices are given below:

No. of listed Closing price Closing price Closing price

Company Shares 2050/10/30 2050/11/1 2050 /11/ 2
NIB 2,000 Rs.700 Rs.730 Rs.750
SHL 820 Rs.50 Rs.55 Rs.54
EBL 1,200 Rs.480 Rs.495 Rs.480
BBC 500 Rs.675 Rs.660 Rs.650
a. Construct an index for 2050 /11 /1 and 2050/11/2, as per the value weighted method, using as the base date, and a base
index value of 100.
b. Compute the return on index from2050 /10/30 to 2050 /11 /1 and 2050 /11 /1 to 2050/11/2.
c. Suppose on 2050/11/2 a company named JSM listed 250 shares at Rs. 100, how would the base value change? What is
the significance of this revised base value? Compute the value weighted index of 2050/11/3 if the price per share of
NIB, SHL, EBL, BBC and JSP were observed as:

Company Closing price of 2050 /11/ 3

NIB Rs.800
SHL Rs.53
EBL Rs.475
BBC Rs.648
JSM Rs. 99
d. Despite the fact that share price of 4 companies out of 5 on 2050/11/3 declined from that of previous day, index
increased significantly, how do you interpret this increment?
Ans. a) Base period index = 100, index of 2050/11/1 =103.17 and index of 2050/11/2 = 103.86 b) 3.17% and 0.67% c. Revised
base value = 23,78,571.89. This value is used to compute the value weighted index of succeeding days till the next additional listing
occurs. Index of 2050/11/3 = 107.72 d. This is because NIB stock, whose market price increased significantly form Rs. 750 to Rs.
800 has the highest market capitalization which resulted into increment in market value index. This is the fact of capitalization
method.

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’ No. of listed Closing prices on
symbol Shares 2050/11/30 2073/05/30 2073 /05/ 31
HBL 8,500 Rs.525 Rs.1,600 Rs.1,580
CHP 4,250 Rs.600 Rs.1,450 Rs.680
SHL 7,500 Rs.80 Rs.475 Rs.1,550
NLIC 9,000 Rs.955 Rs.1,860 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 at Rs. 1,765(ie.,1,800 units). How will you adjust the
base value for additional listing? Also give the significance of this revised base value.
Ans. b. 247.20 and 270.43 c. 9.3972% d. Rs. 1,73,82,294, this is used as a base value to compute the value weighted index of
succeeding dates till the next additional listing occurs.

Problem 3
Consider the following prices of three stocks for three trading days.
Stocks Price on day 1 Price on day 2 Price on day 3
A Rs. 120 Rs. 125 Rs. 70
B 250 248 249

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 C 80 84 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 and return on price weighted index from day 2 to day 3?
Ans. a. 150, 152.33 b. 2.59 c. 155.98 and 2.40%

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?
Ans. a. 350 and 362.33 b. 2.915 c. 432.25

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 date1, Security Date 1 Date 2 Date 3
calculate its value on date 2 and date 3
if the index return is computed on a geometric mean basis.
Ans. 207.60 and 215.35 L Rs.20 Rs.23 Rs.30
M 27 30 31
Problem 7 N 40 35 29
Consider the following four stocks data.

Stocks Prices at the beg of the week Prices at the end of the week
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. Rs. 280

Problem 8
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Consider the following four stocks data applicable for price weighted index.

Stocks Prices at the beg of the year Prices at the end of the year
CHP 1,380 1,550
SBL 850 890
OHL 600 580
BPC 1,430 ?
CIT 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?
Ans. divisior = 1.67 and price = Rs. 1,800

Theoretical Questions
1. What are different methods of market index calculation? How many indices does NEPSE compute
and what are they? Describe sensitive index, float index and sensitive float index.
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.