Question
Consider the three stocks in the following table. P t represents price at time t , and Q t represents shares outstanding at time t.
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.
| P0 | Q0 | P1 | Q1 | P2 | Q2 |
A | 85 | 150 | 90 | 150 | 90 | 150 |
B | 40 | 600 | 35 | 600 | 35 | 600 |
C | 70 | 100 | 80 | 100 | 40 | 200 |
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 of the price-weighted index for the second period (t = 1 to t = 2).
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