Question

Using the data in the previous problem, calculate the first-period rates of return on the following indexes of the three stocks:

a. A market value–weighted index

b. An equally weighted index

Short answer

a. 3.85%

b. 1.85%

Step-by-step solution

Definition

A share of ownership or equity in a company is considered as a stock.

Solution for ‘a’

a. Total market value at t = 0 is: (9,000 + 10,000 + 20,000) = 39,000

Total market value at t = 1 is: (9,500 + 9,000 + 22,000) = 40,500

Rate of return = (40,500/39,000) – 1 = 3.85%

Solution for ‘b’

b. The return on each stock is as follows:

Ra = (95/90) – 1 = 0.0556

Rb = (45/50) – 1 = –0.10

Rc = (110/100) – 1 = 0.10

The equally-weighted average is: [0.0556 + (-0.10) + 0.10]/3 = 0.0185 =

1.85%