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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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