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.
Calculate the first-period rates of return on the following indexes of the three stocks: (Do not round intermediate calculations. Round answers to 2 decimal places.)
An equally weighted index?
Equally weighted index return is calculated as the average of each stock return for the period.
The divisor (for average) is no of stocks.
But when stock split happens , the divisor changes. ie in this case the divisor changes after period 2,
For period 1, there is no stock split ; hence the equally weighted return is imple average of each stock's returns
Return of A = (P1-P0)/P0 = (95-90)/90 = 5.56%
Return of B = (P1-P0)/P0 = (45-50)/50 = -10%
Return of C = (P1-P0)/P0 = (110-100)/ 100 = 10%
Equally weighted index return = (5.56% + (-10%) + 10% ) / 3
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