Question

# There are two stocks, A and B, with the following information:

src="/qa/attachment/10692496/" alt="Stocks.jpg" />

(a) Suppose the initial divisor is 1, construct a price-weighted index using the two stocks. What are the index

level I0, and I1 at time 0 and 1, respectively, and the return from t=0 to t=1?

(b) When there was a 2-for-1 stock split for stock A at t=1, what is D1? Does the index level change?

(c) If you have $200, how would you construct a portfolio that mimics the price-weighted index? What is the

return of your investment? (no split)

(d) Suppose that I0 = 100, construct a value-weighted index using the two stocks and compute its return (no

split)

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