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

question 111

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?

• 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:

Pinworms

Small, parasitic worms that primarily infect the intestines, often causing itching around the anus.

Tapeworms

Parasitic flatworms that live in the digestive tracts of vertebrates, including humans, potentially causing various health issues depending on the species.

Dormant

In a state of inactivity or dormancy, not currently active but with the potential to become active.

Mushrooms

A type of fungus with a stem, cap, and gills or pores underneath the cap, varying greatly in color and size, some of which are edible while others can be poisonous.