Question

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

Consider 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 95       100       100       100       100       100      
  B 55       200       50       200       50       200      
  C 110       200       120       200       60       400      

Calculate the first-period rates of return on the following indexes of the three stocks: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a. A market value–weighted index.
  Rate of return %
b. An equally weighted index.
  Rate of return %

Homework Answers

Answer #1
P0 Q0 P1 Q1 P2 Q2
  A 95 100 100 100 100       100      
  B 55 200 50 200 50       200      
  C 110 200 120 200 60       400     
Answer a) A market value–weighted index.
Return on index = =(100*100+50*200+120*200)/(95*100+55*200+110*200)-1
3.53%
Answer b) An equally weighted index.
i ii iii=ii-i iv=iii/i
P0 P1 return return %
  A 95 100 5 5.26%
  B 55 50 -5 -9.09%
  C 110 120 10 9.09%
5.26%
return = 5.26%/3 1.75%
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