Consider the three stocks in the following table. P t represents price at time t
ID: 1170515 • Letter: C
Question
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period.
a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Rate of return %
b. What will be the divisor for the price-weighted index in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Divisor
References
P0 Q0 P1 Q1 P2 Q2 A 94 100 99 100 99 100 B 54 200 49 200 49 200 C 108 200 118 200 59 400Explanation / Answer
(a).
Rate of return = 3.91%
Explanation;
At t = 0, the index value is (94 + 54 + 108) / 3 = 85.33
At t = 1, the index value is (99 + 49 + 118) / 3 = 88.67
Thus, the rate of return will be (88.67 – 85.33) / 85.33 = 3.91%
(b).
Divisor = 2.33
Explanation;
New divisor will be calculated as follow;
(99 + 49 + 59) / New divisor = 88.67
Thus, new divisor will be 207 / 88.67 = 2.33