How to Calculate the First Period Rates of Return on a Market Value Weighted Index

by Sue-Lynn Carty

An index is a grouping of different securities, and a market value weighted index is the weighted average return rate of each security on the index. To calculate the first period returns, average the weighted return rates for each security from the time you divide the weighted average return at the beginning of the period by the weighted average return at the end of the period.

1. Multiply each stock's current price per share by its number of shares outstanding at the beginning of the period. This gives you each stock's beginning period market capitalization. The beginning of the period is the first month you are choosing to analyze the stock. For example, if you are analyzing the stock from January to December, January is the beginning of the period and December is the end of the period.

2. Add the market capitalization values of each stock at the beginning of the period calculated in Step 1. Simply take the market capitalization values of each individual stock and add them all together.

3. Multiply each stock's current price per share by its number of shares outstanding at the end of the period. This gives you each stock's ending period market capitalization.

4. Sum the market capitalization values of each stock at the end of the period. Add together the values of each stock at the end of the period.

5. Use the formula to calculate the rate of return on a market value weighted index. This gives you the first period rate of return. The formula is total market value at the end of the period divided by the total market value at the beginning of the period. Then you subtract 1 from this figure.

6. Use the following example: The total market value at the beginning of the period is \$50,000 and the total market value at the end of the period is \$55,000. The first period rate of return on a market value weighted index is (\$55,000 / \$50,000) – 1. Breaking down the equation results in 1.10 – 1 = .10. Multiply this number by 100 to change it to a percentage, in this example, the first period rate of return on a market value weighted index is 10 percent.

Items you will need

• Current price per share for each stock
• Current number of shares outstanding
• Calculator

Photo Credits

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