Question

1. (Total 4 points, one point for cach) Consider the following three stocks in the table P and Q. denote stock prices and shares outstanding at time I respectively. Stock C splits two for one in the third period. P 0 1 200 75 61 89 20072 150 66 100 90 200 150 100 72 66 45 150 200 a) Calculate the rate of return for Stock A between time and time I assuming that there is no dividend paid out during this time period b) Calculate the rate of return on the price-weighted index of the three stocks between time 0 and time 1 c) What will be the new divisor for the price-weighted index at time 2? d) Calculate the rates of retum on the market value weighted index of the three stocks between time 0 and 1. won that Ms Chung is bullish on Green Cross

Answer 1

of The time rate o and of return for stock a between time I is given by the bokmula Here no. of share at both times are same. So we won't take that into consideration Total stock Retwen = (P.-Pol+D for stock A where Po Initial stock price at time o. stock price at time 1. Dividend paid. Po D = Total stock Retuen = (72-75) t 75 o as no dividend paid o to time I. out ing the time Total stock for stock Return A = 3 Rate of return for stock A -0.04 ie - 4% Hese , no dividend paid as well as the price of So the rate of return le - 4% out during the given time slook decreased in valve for stock A is negative

The Index time rate of o ok the and return stocks time 1 on the A, B price weighted and c between A price weighted index each of the companies on its share Price s gives the influence to indes based in Po Now and & c denotes time the o prices 75 of stocks AB 61 and 89 at as respectively. To find out rate ots returen from time a to time I will take weighted price of opening stock and closing stock prices. We are not concerned with the no. of shoses. So At time of weighted = 75 +61 + 89 h price 3 At time o. = 75 . Now At time I weighted = 72 +66 +90 3 228 bis = a nt = 76 toca

Now the weighted time to gain is 1 unit from time to So - rate of retusn i n on price weighted index Weighted gain frootol weighted price att=of 0.01333 1333 % kallio So, the rate of return on the price weighted index of the three stocks from time o to time, 1 is 1.333 % . FYI Bow Jones Industrial Average is the oldest price weighted inden .

DATE for price weighted index at New time divison 2 dia the a stocks This is at time the 1 weighted price as the divison of the to price So Weighted at time 1 - 3 72 +66 +90 - Weighted price attel 76 . so the new devisor for the index at time 2 is 76. L price weighted

Bete- d) The rate of return on the weighted index of the three time o and time 1 tolret market - value stocks between Market Value weighted index also known as capital weighed inden! In this the components of the indese are weighted according to the total market value of their outstanding shores .. So here we'll take no. of shares outstanding into the consideration while calculating rate of setuin . I Now we'll calculate market capitalisation of the stocks at time o and time I. Stocks - shares Outstanding Stock Price to t=1 Market Capitalisation 200 1 75 72 15000 14400 150 61 66 913 9900 100 89 90 8900 9000 Sum 450 33050 33300

Now Rate of returin can be given as - Market Capitalisation at t= 1 - otto. - Masket capitalisation at tao (33300 - 3305) 33050 h - = 2 250 33050 = 0.007564 TROR = 0.7564 % 1 an So, the rate of value weighted index between time o and return of the 1 is on the market three stocks 0.7564 %