Question

2. Consider the following data for three stocks.

Stock         Initial Price    Final Price       Number of Outstanding Shares

Stock 1      $10                 $12                   20 million

Stock 2      $25                 $24                   5 million

Stock 3      $100               $106                 1 million

Compute the rate of return for each of the following portfolios:

(a) Price weighted

(b) Value weighted

(c) Equal weighted

Answer 1

A) price weighted return= we will be calculating the price weighted return of of all this stocks without taking any effect of outstanding share

=((12-10)/10)*10/135)+ (24-25)/24*(25/135)+(106-100)/100*100/135)

= (1.4814-.77+4.44)= 5.15584

B) value weighted return- we will be considering number of outstanding shares as well as price.

=(20%)*(200/425)+(-4.166)*(125/425)+(6%*100/125)

=(9.411-1.225+4.8)

= 12.986%

(C) equal weighted return will be calculated by averaging out the return = (20-4.166+6)/3= (21.833/3)= 7.276%