Question

Consider the three stocks in the following table. P represents price at time t, and Q, represents shares outstanding at time t.Stock C splits two-for-one in the last period 86 100 91 100 91 100 92 200 102 200 51 400 200 4 41 a ulate the rate of re u on a price-weighted index o the tree stocks for the f st pero ล. O to t-1 Do not round intermediate calculations. Round your answer to 2 decimal Rate of return [ ]% b. What will be the divisor for the price-weighted index in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 4.46

Answer 1

To calculate the return, we first calculate the index value, which is sum of the prices of all the securities in the index divided by the number of securities.

To calculate the return we just divide the difference between the two by the initial amount of index value in the first period. Which comes out to be 4.46%.

To calculate the divisor in period 2, we calculate the index value assuming there was no stock split, which comes out to be the same as in period 1, as the prices are same.

Then in order to get the value for the divisor, we divide the sum of stocks after stock split which is 183 by the Index value if there was no stock split(78). This is because there should be no change in the index value because of a split, hence there is only a change in the divisor.