Question

1) Assume the following information concerning two stocks that make up an index. What is the value-weighted return for the index?

		Price per Share
	Shares Outstanding	Beginning of Year			End of Year
Kirk, Inc.	37,000	$	53		$	57
Picard Co.	27,000		79			84

Round intermediate steps and your final answer to four decimals. Enter your answer in decimal format ( EX: XXXX).

2) You want to sell 600 shares of DEF stock at the going market price after the stock reaches $42 a share. Which type of order should you place?

		stop
		limit
		market
		good-'til canceled market

3) Which of the following order types could be used to mitigate potential losses from a short sale?

		limit sell order
		stop loss order
		stop buy order
		market sell order

Answer 1

1) In calculating the value weighted index return the key factor is the total market capitalization of each company. Hence, the total no. of shares outstanding of each company determine the weight of a stock in a value weighted index.

Calculation of the weighted index return:-

We know, market capitalization = total no. of shares outstanding * market price per share

Total no. of shares outstanding of Kirk Inc. = 37,000

Total no. of shares outstanding of Picard Co. = 27,000

Price per share of Kirk Inc. at the beginning of the year = $53

Price per share of Picard Co. at the beginning of the year = $79

Therefore, the total beginning market capitalization value of the two stocks = [(37,000 * $53) + (27,000 * $79)]

= $1,961,000 + $2,133,000 = $4,094,000

Similarly,

Price per share of Kirk Inc. at the end of the year = $57

Price per share of Picard Co. at the end of the year = $84

Therefore, the total ending market capitalization value of the two stocks = [(37,000 * $57) + (27,000 * $84)]

=$2,109,000 + $2,268,000 = $4,377,000

Hence, the value weighted index return :-

[(Ending market cap value - Beginning market value) / Beginning market cap value]

= ($4,377,000 - $4,094,000) / $4,094,000

= $283,000 / $4,094,000

=0.06912

Therefore, the value weighted index return = 0.06912 or 6.912 %

(2) The correct option is Limit Order.

The limit order to buy or sell a stock, only gets executed when the market price of that particular stock crosses the set limit value. Until & unless, the specified value is reached the buy/sell order doesn't get executed.
In case of a buy order, an investor can set the maximum limit price he/she is willing to pay for that stock. It should be set below the current traded market price, because until then a better market price is already available. For example, a particular stock is trading at $50 and the investors wont pay more than $46 for it. Hence, he/she will set the limit buy price at $46. This buy order will only get active after the stock price falls down to $46 and then it will get executed at the next available market price.

Similarly, in case of a sell order, an investor can set the minimum limit price he/she is willing to pay for that stock. It should be set above the current traded market price, because until then a better market price is already available. For example, if one wants to sell the stock which is currently trading at $50, only after it reaches $55. He/she would set the limit sell price at $55. The sell order won't get active until its market price reaches $55. As soon as it reaches $55, the limit order to sell gets activated. The stock is then sold at the next available best market price.

3) The correct option is stop buy order.

In a stop loss order, a stop-loss trigger price is set by the investor, which is when achieved, the market order to buy or sell the stock gets activated.
The investor with a short sale position wants the security price to decrease to profit from the short sale. He/she would be adversely affected if that security price rises sharply in the market. Hence in order to protect himself/herself from the potential losses from the sharp rise in the security market price in the short sale position, the investor would set a buy-stop order, which then turns into a market order after the stop loss trigger price as sset by the investor is attained.

For example, a short sale trader is wants to short sell a stock at $40. He would set the stop buy order price nearabout $40, say, $42 to protect himself from the stock price even rising above this price. Once the stop price is triggered the order will get activated and turn into a market order, buying the share at the next current market price.