Assume there are only three stocks in the market: A, B, and C. At time 0, P(A) = $10, P(B) = $20, and P(C) = $10. At time 1, P(A) = $15, P(B) = $30, P(C) = $5. The number of shares outstanding is 1 million for A, 2 million for B, and 2 million for C.

a. What are the individual stock returns for A, B, and C from time 0 to time 1?

b. What is the return on a price weighted index of these three stocks?

c. What is the return on a price weighted index of these three stocks?

d. What is the return on an equal weighted index of these three stocks?

e. Why the three indexes give different returns?

Answer:

a. Ret(A) = (15-10)/10 = 50%, Ret(B) = (30-20)/20 = 50%, Ret(C) = (5-10)/10 = -50%

b. Ret(PW) =