
Requirement 1
To Calculate:
The
Introduction:
Stock exchanges are markets where securities can be bought as well as sold. New York Stock Exchange is one amongst the several markets where the investors can sell their shares or they could purchase their shares or stocks.
Stock Market Indexes are indicators of performance of the stock market.
Dow is the best known measure of the stock market performance.
Price weighted average is an average which is obtained by adding the stock prices and dividing it by a divisor.
Requirement 1

Answer to Problem 11PS
The rate of return on the price-weighted index for the first period for the three stocks is 4.17%
Explanation of Solution
Pt represents the price of a stock at time t and Qt represents the outstanding shares at time t. Stock C is split 2 for 1 in last period.
Stock |
P0 |
Q0 |
P1 |
Q1 |
P2 |
Q2 |
A |
90 |
100 |
95 |
100 |
95 |
100 |
B |
50 |
200 |
45 |
200 |
45 |
200 |
C |
100 |
200 |
110 |
200 |
55 |
400 |
Return on the index is given by subtracting one from the value obtained when Price weighted index of period t1 divided by price weighted index of period t2.
Stock |
Period 0 price |
Period 1 price |
A |
90 |
95 |
B |
50 |
45 |
C |
100 |
110 |
Sum of prices |
240 |
250 |
Price weighted index = |
Sum/divisor |
Sum/divisor |
Price weighted index (PWI) |
80.00 |
83.33 |
Rate of return= |
(PWI 1/PWI 0 )-1 |
|
Rate of return= |
4.17% |
The rate of return on price-weighted index of the three stocks for first period is 4.17%
Requirement 2
To Calculate:
The divisor for the price weighted index in the period 2.
Introduction:
Stock exchanges are markets where securities can be bought as well as sold. New York Stock Exchange is one amongst the several markets where the investors can sell their shares or they could purchase their shares or stocks.
Stock Market Indexes are indicators of performance of the stock market.
Dow is the best known measure of the stock market performance.
Price weighted average is an average which is obtained by adding the stock prices and dividing it by a divisor.
Requirement 2

Answer to Problem 11PS
The divisor at period 2 is 2.34
Explanation of Solution
Pt represents the price of a stock at time t and Qt represents the outstanding shares at time t. Stock C is split 2 for 1 in last period.
Stock |
P0 |
Q0 |
P1 |
Q1 |
P2 |
Q2 |
A |
90 |
100 |
95 |
100 |
95 |
100 |
B |
50 |
200 |
45 |
200 |
45 |
200 |
C |
100 |
200 |
110 |
200 |
55 |
400 |
The divisor generally changes to show the stock split. It is obtained by dividing the sum of prices of stocks in the period when the stock was split by the price-weighted index in the previous period.
Stock |
Period 1 price |
Period 2 price |
A |
95 |
95 |
B |
45 |
45 |
C |
110 |
55 |
Sum of prices |
250 |
195 |
New divisor = |
Sum of stocks prices in period 2/ PWI of Period1 |
|
New Divisor |
2.34 |
The divisor in the second period is 2.34
Requirement 3
To Calculate:
The rate of return of a price-weighted index of three stocks for the period t=1 to t=2
Introduction:
Stock exchanges are markets where securities can be bought as well as sold. New York Stock Exchange is one amongst the several markets where the investors can sell their shares or they could purchase their shares or stocks.
Stock Market Indexes are indicators of performance of the stock market.
Dow is the best known measure of the stock market performance.
Price weighted average is an average which is obtained by adding the stock prices and dividing it by a divisor.
Requirement 3

Answer to Problem 11PS
The rate of return on the price-weighted index for the second period for the three stocks is 0%
Explanation of Solution
Pt represents the price of a stock at time t and Qt represents the outstanding shares at time t. Stock C is split 2 for 1 in last period.
Stock |
P0 |
Q0 |
P1 |
Q1 |
P2 |
Q2 |
A |
90 |
100 |
95 |
100 |
95 |
100 |
B |
50 |
200 |
45 |
200 |
45 |
200 |
C |
100 |
200 |
110 |
200 |
55 |
400 |
Return on the index is given by subtracting one from the value obtained when Price weighted index of period t1 divided by price weighted index of period t2.
Stock |
Period 1 price |
Period 2 price |
A |
95 |
95 |
B |
45 |
45 |
C |
110 |
55 |
Sum of prices |
250 |
195 |
Price weighted index = |
Sum/divisor |
Sum/divisor |
Price weighted index (PWI) |
83.33 |
83.33 |
Rate of return= |
(PWI 2/PWI 1 )-1 |
|
Rate of return= |
0.00% |
The rate of return on price-weighted index of the three stocks for second period is 0%.
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Chapter 2 Solutions
Investments
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