Suppose you are constructing a portfolio of two companies. The first has 10,000 shares outstanding at...

 

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Suppose you are constructing a portfolio of two companies. The first has 10,000 shares outstanding at a current price of $100 per share, while the second has 60,000 shares out- standing at a current price of $50 per share. You have $10,000 to invest. a) How many shares of each company would you buy if you want to construct an equal- weighted portfolio? How many shares of each company would you buy if you want to construct a value-weighted portfolio? b) A year later, company 1's share price has risen to $150 while company 2's share price is unchanged at $50. Neither company has paid a dividend. What are the returns on the equal-weighted portfolio and the value-weighted portfolio you constructed in part a)? Explain the difference. c) How must you trade a year later to keep the equal-weighted portfolio equal-weighted? How must you trade to keep the value-weighted portfolio value-weighted? Explain. (Note: It is suffi cient to explain whether you need to buy or sell the shares of either company. You do not need to calculate the exact amounts.) Suppose you are constructing a portfolio of two companies. The first has 10,000 shares outstanding at a current price of $100 per share, while the second has 60,000 shares out- standing at a current price of $50 per share. You have $10,000 to invest. a) How many shares of each company would you buy if you want to construct an equal- weighted portfolio? How many shares of each company would you buy if you want to construct a value-weighted portfolio? b) A year later, company 1's share price has risen to $150 while company 2's share price is unchanged at $50. Neither company has paid a dividend. What are the returns on the equal-weighted portfolio and the value-weighted portfolio you constructed in part a)? Explain the difference. c) How must you trade a year later to keep the equal-weighted portfolio equal-weighted? How must you trade to keep the value-weighted portfolio value-weighted? Explain. (Note: It is suffi cient to explain whether you need to buy or sell the shares of either company. You do not need to calculate the exact amounts.)