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.
P_{0} | Q_{0} | P_{1} | Q_{1} | P_{2} | Q_{2} | |
A | 55 | 65 | 65 | 65 | 65 | 65 |
B | 45 | 120 | 35 | 120 | 35 | 120 |
C | 90 | 120 | 95 | 120 | 50 | 240 |
Calculate the first-period rates of return on the following indexes of the three stocks (t = 0 to t = 1): (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 %?
a)
Market value weighted index (t = 0) = Sum of (P0 * Q0)
= (55 * 65) + (45 * 120) + 90 * 120)
= 19,775
Market value weighted index (t = 1) = Sum of (P1 * Q1)
= (65 * 65) + (35 * 120) + (95 * 120)
= 19,825
Rate of return = (Market value weighted index (t = 1) - Market
value weighted index (t = 0)) / Market value weighted index (t =
0)
= (19,825 - 19,775) / 19,775
= 50/ 19,775
= 0.25%
Rate of return = 0.25%
b)
Rate of return on stock A = (P1 - P0) / P0
= (65 - 55) / 55
= 10 / 55
= 18.18%
Rate of return on stock B = (35 - 45) / 45
= -10 / 45
= -22.22%
Rate of return on stock C = (95 - 90) / 90
= 5 / 90
= 5.56%
Rate of return on equally weighted index = (18.18% - 22.22% +
5.56%) / 3
= 1.5152% / 3
= 0.51%
Rate of return on equally weighted index = 0.51%
Get Answers For Free
Most questions answered within 1 hours.