Question

# Consider the three stocks in the following table. Pt represents price at time t, and Qt...

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 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

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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