Consider the three stocks in the following table. Pt represents price at time t,
ID: 1170517 • 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. P0 Q0 P1 Q1 P2 Q2 A 91 100 96 100 96 100 B 51 200 46 200 46 200 C 102 200 112 200 56 400 Calculate the first-period rates of return on the following indexes of the three stocks: (Do not round intermediate calculations. Round your answers to 2 decimal places.)
a. A market value–weighted index Rate of return %
b. An equally weighted index Rate of return %
Explanation / Answer
a) Market value-weighted index risk of return is given as:
when t=0, total market value= 91*100+51*200+102*200=9,100+10,200+20,400=$39,700
when t=1, total market value= 96*100+46*200+112*200=9,600+9,200+22,400=$41,200
so return=(41,200-39,700)/39,700=0.0378 or 3.78%
b) Return on A=(96-91)/91=0.0549 or 5.49%
Return on B=(46-51)/51=-0.098 or -9.8%
Return on C=(112-102)/102=0.098 or 9.8%'
thus equally weighted index rate of return=(5.49-9.8+9.8)/3=1.83%