2.3 a. You are entitled to a prorated share of IBMs dividend payments and to vote in any of IBMs stockholder meetings. b. Your potential gain is unlimited because IBMs stock price has no upper bound. c. Your outlay was $190 100 = $19,000. Because of limited liability, this is the most you can lose.

2.4 The price-weighted index increases from 62.50 [=(100 + 25)/2] to 65 [=(110 + 20)/2], a gain of 4%. An investment of one share in each company requires an outlay of $125 that would increase in value to $130, for a return of 4% (=5/125), which equals the return to the price-weighted index. 2.5 The market valueweighted index return is calculated by computing the increase in the value of the stock portfolio. The portfolio of the two stocks starts with an initial value of $100 million + $500 million = $600 million and falls in value to $110 million + $400 million = $510 million, a loss of 90/600 = .15, or 15%. The index portfolio return is a weighted average of the returns on each stock with weights of on XYZ and on ABC (weights proportional to relative investments). Because the return on XYZ is 10%, while that on ABC is -20%, the index portfolio return is () 10 + ()(-20) = -15%, equal to the return on the market valueweighted index. 2.6 The payoff to the call option is $110 - $100 = $10. The call cost $2.62. The profit is $10 - $2.62 = $7.38 per share. The put will pay off zeroit expires worthless since the stock price exceeds the exercise price. The loss is the cost of the put, $1.55.