Consider the three stocks in the following table. Pt represents price at time t,
ID: 2761096 • 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 83 100 88 100 88 100 B 43 200 38 200 38 200 C 86 200 96 200 48 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). (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.)
Explanation / Answer
a.Price weighted index for t = 0 = (83+43+86)/3 = 70.67
Price weighted index for t =1 = (88+38+96)/3 = 74
Return = (74-70.67)*100/70.67 = 4.71%
b.
(88+38+48*2)/3 = (88+38+48)/divisor
divisor = 2.35