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We know there are multiple types of indexes like market cap weighted and equal weighted indexes, etc., Currently am working on S&P 500 and is there any way to calculated PE ratio for S&P 500 using PE ratios of individual companies.

if we have EPS, no. of shares outstanding and market capital for all the stocks then we can calculate, but is there any way to calculate in the above process.

with the help of below wiki link

https://en.wikipedia.org/wiki/Price%E2%80%93earnings_ratio#Historical_P/E_ratios_for_the_U.S._stock_market

Weighted Index P/E= market capitalization/net income
Market cap = market price x current number of shares
Net income = EPS x weighted average number of shares
Ragadeepthi Thadakamadla
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2 Answers2

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The Price to Earnings ratio is a relatively simple equation - the price of the security as it is traded, divided by the earnings that the security produces each quarter.

However, the challenge with many of these index type products is the precise composition is not easily known. For a given index, exactly how many shares of AAPL are contained within it, and how many shares of IBM or the other 498 (approximate) securities?

The people who decide what the indexes contain and the exact proportions do provide this information but for a fee. If you pay the fee, then you get the data, and can calculate the proportions (or "weightings") and then calculate the overall value.

You could approximate, such as by ranking the index components by market cap on the last rebalancing date. This will produce a number, but with some error.

xirt
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  • I think you overstate the difficulty of finding out the weightings in an index. To a very good approximation, the current market caps of the S&P 500 stocks determine their weightings. (No reason to look back to the last rebalancing date, because the weightings automatically -- without rebalancing -- change as market caps change. Weightings are by dollars, not shares.) But you don't address how to actually compute the index P/E from the component P/Es and weightings. It's not simply the weighted arithmetic mean; it's the weighted harmonic mean. – nanoman Jul 10 '19 at 18:44
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... is there any way to calculated PE ratio for S&P 500 using PE ratios of individual companies?

If an index is equal weighted, if all you know is the PE of the components then you cannot determine the PE of the index by adding the individual PEs and dividing by the total number of components.

You need the individual price and earnings for each company and you must sum them each before dividing the totals.

If it's not equal weighted, you must apply the weighting before dividing the sums.

Bob Baerker
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  • If an index is equal weighted (unlike the cap-weighted S&P 500), you can determine the P/E of the index from the individual P/Es; it is the unweighted harmonic mean. Example: equal-weighted index whose 5 component P/Es are 6, 8, 16, 24, and 48. The index P/E is 12. – nanoman Jul 10 '19 at 20:25
  • The P/E ratio of an index is calculated by dividing the index's total price by its total earnings. The harmonic mean of the components will not yield the same result other than by occasional coincidence. – Bob Baerker Jul 11 '19 at 16:54
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    You stipulated "If an index is equal weighted" and my comment applies in that case. An equal-weighted index holds the same dollar amount in each component, say $48 (to make the math easier). Then the earnings corresponding to each of the holdings are $8, $6, $3, $2, and $1. The total earnings of the index are $20 and the index value is 5 x $48 = $240. The P/E is $240/$20 = 12. It is the harmonic mean, no coincidence. – nanoman Jul 11 '19 at 20:07