onsider 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 | 87 | 100 | 92 | 100 | 92 | 100 |
B | 47 | 200 | 42 | 200 | 42 | 200 |
C | 94 | 200 | 104 | 200 | 52 | 400 |
a. Calculate the rate of return on a
price-weighted index of the three stocks for the first period
(t = 0 to t = 1). (Do not round
intermediate calculations. Round your answer to 2 decimal
places.)
b. What will be the divisor for the price-weighted
index in year 2? (Do not round intermediate calculations.
Round your answer to 2 decimal places.)
c. Calculate the rate of return of the
price-weighted index for the second period (t = 1 to
t = 2).
a. Rate of return on a price-weighted index of the three stocks for the first period = (Average of prices in t1 / Average of prices in t0) - 1
Rate of return on a price-weighted index of the three stocks for the first period = ((92+42+104)/3) / (87+47+94)/3) - 1
Rate of return on a price-weighted index of the three stocks for the first period = (79.33 / 76) - 1
Rate of return on a price-weighted index of the three stocks for the first period = 4.39%
b. New divisor = Total prices in t2 / average price in t1
New divisor = (92+42+52) / 79.33
New divisor = 2.34
c. rate of return of the price-weighted index for the second period = 0.00 Since there is no change in prices of the stock after split
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