Question

# Assume that there are two stocks in the world (STOCK A and STOCK B) as presented...

Assume that there are two stocks in the world (STOCK A and STOCK B) as presented below:

STOCK                                                                                                                                   P0                    Q0                    P1                   Q1

A                                                                                                                    35                    200                  29.75               200

B                                                                                                                                            30                    100                  27                    100

P0 represents the price per share at time period 0 (today).

Q0 represents the number of shares outstanding at time period 0 (today).

P1 represents the price per share at time period 1 (one year from today).

Q1 represents the number of shares outstanding at time period 1 (one year from today).

Assume that you have a total of \$65 to invest on P0.

23)       If your portfolio is an EQUALLY-WEIGHTED INDEX of the two stocks, how many shares of STOCK B do you buy?  (YOU CAN BUY A FRACTION OF A SHARE)

A.  1

B.  100

C.  .9986

D.  1.083

E.  None of the above  (Put the correct answer next to the letter E on the answer sheet.)

24)  Which stock, if any, carries more weight when calculating the rate of return using the PRICE-WEIGHTED AVERAGE method?

A.  STOCK A

B.  STOCK B

Q - 23

Equally weighted index. Hence, an equal amount = 65 / 2 = 32.5 should be invested in each stock.

Hence, number of shares of STOCK B you buy = 32.5 / P0 = 32.5 / 30 = 1.083

Hence, the correct answer is the option D. 1.083

Q - 24

In price weighted average method, a stock with a higher price gets higher weight than a stock with a lower price. Stock A has higher P0 and P1 than B. Hence, it should get higher weight.

Hence, the correct answer is the option A. STOCK A

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