Consider the three stocks in the following table. Pt represents price at time t,
ID: 2774730 • 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. 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. Omit the "%" sign in your response.) Calculate the new divisor for the price-weighted index in year 2. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Calculate the rate of return for the second period (f = 1 to t = 2). (Omit the "%" sign in your response.)Explanation / Answer
a) The value of the price-weighted index in period 0 is (80+30+65)/3 = 58.33 . The value of the index at time t = 1 is (85+25+80)/3 = 61.66. Thus the return on the price-weighted index from time t = 0 to time t = 1 is :
(61.66-58.33)/58.33 = 5.71%
b) There is no change in prices for asset C from period 1 to 2 since 40 = 80/2, and the prices of asset A and asset B are the same in both periods. Hence the value of the price-weighted index should be the same in periods 1 and 2. Let D represent the divisor in period 2. Then we have
(85+25+80)/3 = (85+25+40)/D
D = 2.36
c) The index has not changed, thus its return is zero.