Consider the three stocks in the following table. Pt represents price at time t,
ID: 2722753 • 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 86 100 91 100 91 100 B 46 200 41 200 41 200 C 92 200 102 200 51 400 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
The value of the price-weighted index in period 0 is 90+50+100 3= 80. The value of the index at time t = 1 is 95+45+110 3= 83. 33. Thus the return on theprice-weighted index from time t = 0 to time t= 1 is 83 . 33 – 80 80= 4.17%.
Let D represent the divisor in period 2. Then we have 95 + 45 + 110/ 3 = 95 + 45 + 55/D
= D = 95 + 45 + 55/ 95 + 45 + 110 × 3 = 2.34. The index has not changed, thus its return is zero.