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.

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 must happen to the divisor for the price-weighted index in year 2?

c. Calculate the rate of return for the second period ( t = 1 to t = 2).

Transcribed Image Text:

Po Qo P Q Pz Qz 90 100 95 100 95 100 50 200 45 200 45 200 100 200 110 200 55 400 A B C