Consider the three stocks in the following table. P t represents price at time t
ID: 2382660 • 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 spits two-for-one in the last period.
P0
Q0
P1
Q1
P2
Q2
A
90
100
95
100
95
100
B
50
200
45
200
45
200
C
100
200
110
200
55
400
a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t=0 to t=1).
b. What must happen to the divisor for the price-weighted index in year 2?
c. Calculate the rate of return of the price-weighted index for the second period (t=1 to t=2).
P0
Q0
P1
Q1
P2
Q2
A
90
100
95
100
95
100
B
50
200
45
200
45
200
C
100
200
110
200
55
400
Explanation / Answer
a)At T0 value of index = (90+50+100 )/ 3
= $ 240/3
= $ 80
At T1 ,value of index = (95+45+110 )/3
= 250/3
= $ 83.33
Rate of return = (83.33 -80 )/80
= 3.33 /80
= 4.17%
B)In absence of split stock C would sell for $110 so value of index would be average price of three stocks = (95+45+110)/3
= $ 83.33
The value of index is not effected by split so value of index after split should also be $ 83.33
so divisor =??
83.33 = (95+45+55 )/D
83.33 = 195 /D
D(Divisor )= 195 /83.33
= 2.34
C) Th rate of return should be 0.The value of index remain unchanged.