Question

Consider 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	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

%

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%