Consider the three stocks in the following table.
P_{t} represents price at time t, and
Q_{t} represents shares outstanding at time
t. Stock C splits two-for-one in the last
period.
P_{0} | Q_{0} | P_{1} | Q_{1} | P_{2} | Q_{2} | |
A | 88 | 100 | 93 | 100 | 93 | 100 |
B | 48 | 200 | 43 | 200 | 43 | 200 |
C | 96 | 200 | 106 | 200 | 53 | 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
b. An equally weighted index
Answer:
a.) Calculation of Rate of return
Market Value of Index at t=0 ((88*100)+(48*200)+(96*200))
=8800+9600+19200
= 37600
Market Value of Index at t=1 ((93*100)+(43*200)+(106*200))
=9300+8600+21200
= 39100
Rate of Return = (39100-37800)/37800
Rate of Return = 0.03439% or 3.44%
b.) Calculation of Rate of Return
Return of Stock A from t=0 to t=1 = (93-88 / 88) = 5.68%
Return of Stock B from t=0 to t=1 = (43-48 / 48) = -10.42%
Return of Stock C from t=0 to t=1 = (106-96 / 96) = 10.42%
Rate of Return = ((5.68%+(-10.42%)+10.42%)/3) Rate of Return = 1.89%
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