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 | 97 | 100 | 102 | 100 | 102 | 100 |
B | 57 | 200 | 52 | 200 | 52 | 200 |
C | 114 | 200 | 124 | 200 | 62 | 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)
b. What will be the divisor for the price-weighted index in year 2?
c. Calculate the rate of return of the price-weighted index for the second period (t = 1 to t = 2).
a)
Value of index (t=0) = (97 + 57 + 114) / 3 = 268 / 3 = 89.33
Value of index (t=1) = (102 + 52 + 124) / 3 = 278 / 3 = 92.67
Rate of return = (Value of index (t=1) - Value of index (t=0)) /
Value of index (t=0)
= (92.67 - 89.33) / 89.33
= 3.3333 / 89.3333
= 3.73%
Rate of return = 3.73%
b)
92.67 = (102 + 52 + 62) / Divisor
92.67 = 216 / Divisor
Divisor = 216 / 92.67 = 2.33
Divisor = 2.33
c)
Rate of return = (Value of index (t=2) - Value of index (t=1)) /
Value of index (t=1)
= (92.67 - 92.67) / 92.67
= 0.00%
Rate of return = 0.00%
Get Answers For Free
Most questions answered within 1 hours.