Question

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

onsider 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 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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