Assume there are only three stocks in the market: A, B, and C. At time 0, P(A) =
ID: 2637503 • Letter: A
Question
Assume there are only three stocks in the market: A, B, and C. At time 0, P(A) = $10, P(B) = $20, and P(C) = $10. At time 1, P(A) = $15, P(B) = $30, P(C) = $5. The number of shares outstanding is 1 million for A, 2 million for B, and 2 million for C.
a. What are the individual stock returns for A, B, and C from time 0 to time 1?
b. What is the return on a price weighted index of these three stocks?
c. What is the return on a price weighted index of these three stocks?
d. What is the return on an equal weighted index of these three stocks?
e. Why the three indexes give different returns?
Please show detailed solutions will offer max points!!!!!!
Explanation / Answer
a. What are the individual stock returns for A, B, and C from time 0 to time 1
A = 5 million , B = 20 million ,C = -10 million
b. What is the return on a price weighted index of these three stocks
price weighted index = 10 /40
price weighted index = 25 %
d. What is the return on an equal weighted index of these three stocks
equal weight index = 15 million /70 million
equal weight index = 21.4 %
e. Why the three indexes give different returns
because they had different face value and no. of shares were also different. they reacted differently with market.