Company A has a stock price of $50 and 10 million shares outstanding, Company B has a stock price of $80 and 5 million shares outstanding, and Company C has a stock price of $120 and 3 million shares outstanding. What is the first step in calculating the market-capitalization-weighted stock index?
Answer
A
Add the total shares outstanding among the companies and divide the sum by three.
B
Divide the sum of the company stock prices by the number of companies.
C
Multiply each company's stock price by its number of shares outstanding.
D
Subtract the total number of shares outstanding from the combined stock prices.
Explanation
First calculate each company’s market capitalization by multiplying its stock price by its shares outstanding. For example, Company A’s is $50 × 10 million shares = $500 million; do the same for Companies B and C before combining the values to form the index. So the first step is to multiply each company’s stock price by its number of shares outstanding.
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