You want to create a price-weighted index consisting of the following three stocks. At t...
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You want to create a price-weighted index consisting of the following three stocks. At t = 0, you arbitrarily set the initial value of the index at 100. 1. Stock AStock B August (t-0 Share Price September (t-1) Share Price $40 $44 S50 S54 Stock C $100 $110 (a) Given a (hypothetically) same percentage change in price-e.g., 190-which stock will have the greatest impact on the value of index? Why? Explain in words. (3 marks) (b) Define a divisor as a constant that divides the sum of the three prices (price of A+ price of B price of C) to reach the index value. What is the value of the divisor at t 0? (3 marks) (c) Compute the price-weighted index value at t = 1 . What is the monthly percentage return on the index from t 0 to t = 1? (3 marks) (d) Now consider a 2-for-1 stock split for stock C in September, t-1. That is, each old share of stock C becomes 2 new shares while the price per share is halved from S110 to $55. What is the new value of the divisor? (4 marks)
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