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 | 90 | 100 | 95 | 100 | 95 | 100 |
B | 50 | 200 | 45 | 200 | 45 | 200 |
C | 100 | 200 | 110 | 200 | 55 | 400 |
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
= 1.852%
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