Question

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.

	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).

Answer 1

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