6F111-Study PROBLEM SET 1B

6F111-Study PROBLEM SET 1B - PROBLEM SET 1B Securities...

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PROBLEM SET 1B Securities’ Index Problems 1. Price-Weighted Index Problem. a. Let I be a price-weighted index where the index portfolio consists of two securities, initially identified as A and B, at time t = 0. The market prices of A and B at t = 0 are P 0 (A) = $50, and P 0 (B) = $30. The initial value of the index is I 0 = 80/2 = 40. Assume, too, that the market prices of A and B at t = 1 are P 1 (A) = $40 and P 1 (B) = $60. (1) Calculate I 1 , the value of the index at t = 1. (2) Calculate the percentage change in the index from t = 0 to t = 1. b. Assume now that stock B splits 3 for 1 at t = 1, and that the post-split price of B is P 1S (B) = $60/3 = $20. (Notice that P 1S (B) denotes the post-split price of B at t = 1 whereas P 1 (B) denotes the pre-split price of B at t = 1.) (1) Using the information from part 1a, please state the post-split value of the index at t = 1. (2) Calculate the post-split value of the index devisor. c.
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6F111-Study PROBLEM SET 1B - PROBLEM SET 1B Securities...

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