This topic contains a solution. Click here to go to the answer

Author Question: A popular value-weighted index is constructed out of shares in the two companies, shown in the table ... (Read 27 times)

tth

  • Hero Member
  • *****
  • Posts: 579
A popular value-weighted index is constructed out of shares in the two companies, shown in the table below. On Day 1 you construct a portfolio that mimics the index with 15 invested in Company 1 and 85 invested in Company 2.
 
  On Day 2, what trades do you need to make in order to adjust your portfolio weights so that your portfolio earns the same return as the index from Day 2 to Day 3?
 
   Company 1 Company 1 Company 2 Company 2
  Day Price  of Shares Outstanding Price  of Shares Outstanding
  1 6.62 400 10.00 1,500
  2 7.53 400 10.54 1,500
  3 8.82 400 11.07 1,500
 
  A) Buy more of Company 1 and buy more of Company 2
  B) Buy more of Company 1 and sell some of Company 2
  C) Sell some of Company 1 and sell some of Company 2
  D) Sell some of Company 1 and buy more of Company 2
  E) Make no trades

Question 2

What does the law of one price say?
 
  What will be an ideal response?



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by a Subject Expert

bassamabas

  • Sr. Member
  • ****
  • Posts: 294
Answer to Question 1

E

Answer to Question 2

Applied to international trade, the law of one price states that the same goods should sell for the same price in different
countries after making adjustment for the exchange rate between the two currencies. The idea is that the worth of a
good does not depend on where it is bought or sold. Thus, in the long run, exchange rates should adjust so that the
purchasing power of each currency is the same. As a result, exchange rates should reflect the international differences
in inflation rates, with countries with high rates of inflation experiencing declines in the value of their currency.
The law of one price is the underlying principle of the theory of purchasing-power parity (PPP) that states that
exchange rates adjust so that identical goods cost the same amount regardless of where in the world they are
purchased.





 

Did you know?

You should not take more than 1,000 mg of vitamin E per day. Doses above this amount increase the risk of bleeding problems that can lead to a stroke.

Did you know?

Your heart beats over 36 million times a year.

Did you know?

Your chance of developing a kidney stone is 1 in 10. In recent years, approximately 3.7 million people in the United States were diagnosed with a kidney disease.

Did you know?

The tallest man ever known was Robert Wadlow, an American, who reached the height of 8 feet 11 inches. He died at age 26 years from an infection caused by the immense weight of his body (491 pounds) and the stress on his leg bones and muscles.

Did you know?

When Gabriel Fahrenheit invented the first mercury thermometer, he called "zero degrees" the lowest temperature he was able to attain with a mixture of ice and salt. For the upper point of his scale, he used 96°, which he measured as normal human body temperature (we know it to be 98.6° today because of more accurate thermometers).

For a complete list of videos, visit our video library