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c. Calculate the rate of return for the second period (t 1 to t- 2). Rate of return 5 of 12 Next > < Prev
Consider the three stocks in the following table. P, represents price at time t, and Q, represents shares outstanding at time
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Answer #1

a). Index Value(t=0) = [(Pricei)] / n

= [110 + 90 + 80] / 3 = 280 / 3 = 93.33

Index Value(t=1) = [(Pricei)] / n

= [115 + 85 + 100] / 3 = 300 / 3 = 100

Return(t=0 to t=1) = [Index Value(t=1) - Index Value(t=0)] / Index Value(t=0)

= [100 - 93.33] / 93.33 = 6.67 / 100 = 0.0667, or 6.67%

b). Assume the divisor for year 2 be d

Index Value(t=1) = Index Value(t=2)

[115 + 85 + 100] / 3 = [115 + 85 + 50] / d

300 / 3 = 250 / d

100 = 250 / d

d = 250 / 100 = 2.50

c). Index Value(t=2) = [(Pricei)] / n

= [115 + 85 + 50] / 3 = 250 / 3 = 83.33

Return(t=1 to t=2) = [Index Value(t=2) - Index Value(t=1)] / Index Value(t=1)

= [83.33 - 100] / 100 = -16.67 / 100 = -0.1667, or -16.67%

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