1) a) If you buy 100 shares of IBM stock, to what are you entitled

b) What is the most money you can make on investment over the next year

c) If you pay $180 per share ,what is the most money you can lose over the year

2)

Stock Initial price($) Final price($) Shares( millio Initial value Final value of
n) of outstanding
outstanding stock( Million
stock( Million )
)

ABC 25 30 20 500 600

XYZ 100 90 1 100 90
Total 600 690

From the above table

a) Calculate Value of Index and Percentage change in Index-

1)Price Weighted average

2) Market Value Weighted Index

b) Suppose XYZ were to split two for one. Then calculate

1)Price Weighted average

2) Market Value Weighted Index

C) Suppose the price of XYZ increases to $110 and that of ABC falls to $20.Calculate both
before and after split

1))Price Weighted average

2) Market Value Weighted Index

3)
 • Calculate a Dow Jones Industrial Average for Days 1 through 5.

• What effects have the splits had in determining the next day’s index?

• Calculate a Standard & Poor’s Index for Days 1 through 5 using a beginning index value of 10.

• Identify what effects the splits had in determining the next day’s index.

4) Suppose the real interest rate is 3% per year and the expected inflation rate is 8%.What is
the nominal interest rate
5) During the past five years, you owned two stocks that had the following annual rates of
return

Year Stock T Stock B

1 0.19 0.08
2 0.08 0.03
3 -0.12 -0.09
4 -0.03 0.02
5 0.15 0.04

a) Compute the arithmetic mean annual rate of return for each stock. Which stock is most
desirable by this measure
b) Compute the Standard Deviation of the annual rate of return for each stock .By this
measure, which is the preferred stock
c) Compute the coefficient of variation for each stock. By this measure, which is a
preferable stock
d) Compute the geometric mean rate of return for each stock.

Answers

1 a) Dividend and Voting rights

b) Gain is unlimited as IBM stock price has no upper limit

c) $ 18000

2) a) Value of Index and Percentage change in Index-

1)Price Weighted average

Initial Index value= 25+100/2= 62.5

Final Index Value= 30+90/2= 60

% change in Index= -2.5/62.5 *100= -4%

2) Market Value Weighted Index

Initial Index Value= 100

Final Index value= 100 *690/600= 115%

% Change= 115-100/100= 15%

b) Suppose XYZ were to split two for one.

1)Price Weighted average

Data after split

Stock Initial price($) Final price($) Shares( millio Initial value Final value of
n) of outstanding
outstanding stock( Million
stock( Million )
)

ABC 25 30 20 500 600

XYZ 50 45 2 100 90
Total 600 690

New Divisor= 25+50/62.5= 1.2

Final Value Index= 30+45/1.2= 62.5

% change=0

2) Market Value Weighted Index

No change due to split- Same as above

C) Suppose the price of XYZ increases to $110 and that of ABC falls to $20.Calculate both
before and after split

1))Price Weighted average

a) Before Split

Initial Index value= 20+110/2= 65

Final Index Value= 30+90/2= 60

% change in Index= -5/65*100= -7.69

b) After Split

New Divisor= 20+55/65= 1.15

Final Value Index= 30+45/1.15= 65.22

 % change=0.338%

2) Market Value Weighted Index

Before Split

Initial Index Value= 100

Final Index value= 100 *690/510= 135.29%

% Change= 135.29-100/100= 35.29%

b) After Split

No change due to split- Same as above

3) DOW Jones

• Calculate a Dow Jones Industrial Average for Days 1 through 5.

Days Before Split After Split

1
A 12
B 23
C 52
2
A 10 10
B 22 44
C 55 55
3
A 14 14
B 46 46
C 52 26
4
A 13
B 47
C 25
5
A 12
B 45
C 28
 Price Weighted average

Day1 = 12+23+52/3= 29

Day2

Before Split= 10+22+55/3= 29

After Split= 10+44+55/29=3.7586- New Divisor

Day3

Before Split= 14+46+52/3.7586=29.798

After split=14+46+26/29.798=2.886

Day4 = 13+47+25/2.886= 29.4525

Market Value Weighted Index- Methodology is provided below- Complete the remaining
calculations for each day taking Index value as 10

Day-1

Market Capitalisation= ( 12*500+23*350+52*250)=27050

Initial Value =10

Day 2

Market Capitalisation= ( 10*500+44*175+55*250)=26450

Day3

Market Capitalisation= ( 14*500+46*175+26*500)=28050

Day 4

Market Capitalisation= ( 13*500+47*175+25*500)=27225

Day 5

Market Capitalisation= ( 12*500+45*175+26*500)=26875

4) Nominal rate= 11.24%