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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