A Popular Value-Weighted Index Is Constructed Out of Shares in the Two

question 78

Multiple Choice

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? $$\begin{array} { | c | c | c | c | c | } \hline & \text { Company 1 } & \text { Company 1 } & \text { Company 2 } & \text { Company 2 } \\\hline \text { Day } & \text { Price } & \begin{array} { c } \text { \# of Shares } \\\text { Outstanding }\end{array} & \text { Price } & \begin{array} { c } \text { \# of Shares } \\\text { Outstanding }\end{array} \\\hline 1 & 6.62 & 400 & 10.00 & 1,500 \\\hline \mathbf { 2 } & 7.53 & 400 & 10.54 & 1,500 \\\hline \mathbf { 3 } & 8.82 & 400 & 11.07 & 1,500 \\\hline\end{array}$$

• 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

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Definitions:

Bailment

A legal relationship where physical possession of personal property is transferred from one party to another, with the understanding that the property will be returned.

Writing

The act or process of producing and recording words in a form that can be read and understood; typically involves the use of a pen, pencil, or keyboard.

Bailee

A person or entity to whom goods are entrusted for a specific purpose by the bailor, who owns the goods.

Private Property

An ownership model where the possession of land, resources, or items is vested in individuals or organizations, distinct from public or state ownership.