Investment Management Problems set 3 – Market Indicators

1) The following are monthly percentage price changes for four market indexes.

Month DJIA S & P 500 Russell 2000 Nikkei

1 0.03 0.02 0.04 0.04
2 0.07 0.06 0.10 -0.02
3 -0.02 -0.01 -0.04 0.07
4 0.01 0.03 0.03 0.02
5 0.05 0.04 0.11 0.02
6 -0.06 -0.04 -0.08 0.06
Compute the following.
a.Average monthly rate of return for each index
b.Standard deviation of return for each index
c.Covariance between the rates of return for the following indexes;
DJIA-S&P 500
S&P 500- Russell 2000
S&P 500 – Nikkei
Russell 2000 – Nikkei
d.The correlation coefficients for the same four combinations

Using the answers from parts (a), (b) and (d) calculate the expected return and standard
deviation of a portfolio consisting of equal parts of (1) the S&P and the Russell 2000 and
(2) the S&P and the Nikkei. Discuss the two portfolios.
2) You are given the following information regarding prices for a sample of stocks.

PRICE
STOCK NUMBER OF SHARES T T +1
A 1,000,000 60 80
B 10,000,000 20 35
C 30,000,000 18 25

a. Construct a price-weighted index for these three stocks, and compute the percentage
change in the index for the period from T to T + 1.
b. Construct a value-weighted index for these three stocks, and compute the percentage
change in the index for the period from T to T + 1
c. Briefly discuss the difference in the results for the two indexes.

3) Consider the information below on stock A, B, C, D

Stock Number of shares Price of week 1 Price on week 2 Price on week 3
A 200 20 23 25
B 500 35 33 32
C 600 15 16 15

1
 D 800 5 8 10

a. Calculate the price-weighted average for the four stocks on weeks 1, 2, and week 3
b. What is the percentage change in the average among the three dates?
c. Calculate a value-weighted index using week 1as the base period and assign a value of 50
for the base level. What is the value of the index on week 2 and 3?
d. What is the percentage change in the index between the three dates?
e. Explain the difference in percentage changes in b and d,