Consider the three stocks in the following table. Pt represents price at time t,
ID: 2814674 • 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 (t-2) 2 105 100 200 200 100 200 200 100 200 400 105 100 60 120 130 65 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 3.58 % 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.) Divisor 52Explanation / Answer
Price weighted index = (sum of the values of stock price)/ number of stocks
price weighted index in year 0 = (100 + 60 + 120)/3 = 93.33
price weighted index of year 1 = (105 + 55 + 130)/3 = 96.67
rate of return of price weighted index = (96.67 - 93.33)/93.33 = 3.57%
at t= 2 divisor will be equal to given by following formula:
(105 + 55+ 65)/x = 96.67
x = 2.33
new divisor will be equal to 2.33