AFM131 Lecture 13: AFM131 Module6-2
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Suppose we want to value Asset A with the following future cash flow stream:
t | 0 | 1 | 2 | 3 |
A | -Pa | 100 | 150 | 300 |
We also observe the market prices and cash flow streams of Assets B, C, and D:
t | 0 | 1 | 2 | 3 |
B | -270 | 300 | ||
C | -250 | 300 | ||
D | -100 | 150 |
What is the price of the Asset A according to the arbitrage approach to asset valuation?
Suppose instead that the cash flow streams are as follows:
t | 0 | 1 | 2 | 3 |
B | -270 | 300 | ||
C | -320 | 100 | 300 | |
D | -370 | 50 | 300 | 150 |
What is the price of Asset A in this case? (Hint: begin the analysis from period 3)
1. You want to create a price-weighted index consisting of the following three stocks.
At t = 0, you arbitrarily set the initial value of the index at 100.
stockA | stockB | StockC | |
August (t=0) Share Price | $40 | $60 | $100 |
September (t=1) Share Price | $44 | $54 | $110 |
(a) Given a (hypothetically) same percentage change in price â e.g., 1% - which stockwill have the greatest impact on the value of index? Why? Explain in words.
(b) Define a divisor as a constant that divides the sum of the three prices (price of A +price of B + price of C) to reach the index value. What is the value of the divisor at t =0?
(c) Compute the price-weighted index value at t = 1. What is the monthly percentagereturn on the index from t = 0 to t = 1?
Now consider a 2-for-1 stock split for stock C at t = 1. That is, each old share of stock Cbecomes 2 new shares while the price per share is halved from $110 to $55.
(d) What is the new value of the divisor?