Question

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.

	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

Answer 1

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%