Problem 1 Indexes (33 points)

Consider the three stocks in the following table. P_t represents the price at the end of period t and Q_t is the number of shares outstanding. Stock C splits 3:1 during period 2.

	P0	Q0	P1	Q1	P2	Q2
A	$ 72.00	150.00	$ 60.00	150.00	$ 75.00	150.00
B	$ 37.00	400.00	$ 41.00	400.00	$ 40.00	400.00
C	$ 9.00	200.00	$ 15.00	200.00	$ 8.00	600.00

1.1 Calculate the price-weighted index of the three stocks for each period (4 points). What is the divisor for each period (4 points)? Does it change in the last period (2 points)? Why or why not (2 points)?

1.2 Calculate the price-weighted index returns for the periods ending in 1 and 2 (7 points).

1.3 Calculate the value-weighted index returns for the periods ending in 1 and 2 (7 points).

1.4 Calculate the equal-weighted index returns for the periods ending in 1 and 2 (7 points).

33 points

Question 2

Problem 2 Margin (34 Points)

2.A. The current market price for XYZ is $46 per share. Initial margin is 50%, maintenance margin is 35% and margin interest is 1.25% per year.

2.A.1) You believe the stock price will increase over the next year and wish to trade exactly one round lot. What trade should you make (2 points)? How much margin would you have to post to your account (4 points)? At what price would you receive a margin call (7 points)?

2.A.2) Suppose you are correct and the stock rises to $59 per share at the end of the year. What is your percentage return on equity for this trade (4 points)?

2.B. The current market price for ABC is $72 per share. Initial margin is 50%, maintenance margin is 35% and there is no margin interest.

2.B.1) You believe the stock price will decrease over the next year and wish to trade exactly one round lot. What trade should you make (2 points)? How much margin would you have to post to your account (4 points)? At what price would you receive a margin call (7 points)?

2.B.2) Suppose you are correct and the stock falls to $60 per share at the end of the year. What is your percentage return on equity for this trade (4 points)?