Solutions for Week 02
Question 1
a) For price weighted index:
Rp= [5/2+(122.5- 125)]/125 = 0%
For market value weighted index:
Rp= [5000+74,000-70,000]/70,000 = 12.875%
b). For price weighted index:
D/P = 5/122.5 = 4.08%
For market value weighted index
D/P = 5000/74,000=6.757%
c).
Ea = 55/15 = 3.667
Eb = 190/25 = 7.6
For price weighted index
P/E = (190+55)/2/(3.667+7.6) =10.87
For market value weighted index
74000
P/E = ___________________________________ = 1.67
3.667x1000+7.6x100
(S&P500 company uses the following method to calculate P/E ratio, P/E= Sum(
market value of index)/Sum(Earning of all stocks).
Notes: Please notice the results differences based on different methods. Dow Jones
Index uses Price-weighted, whereas S&P500, FTSE100 and NASDAQ use
Capitalization weighted method.
Question 2
Consider the follows:
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The overviews of economy across those stock markets at that time ( 10/02)
Dow Jones does not include technology stocks such as Microsoft, which do
not pay a dividend and hence have a zero dividend yield
Generally the higher the PE the lower the DY
The trailing figures for NASDAQ and NK225 are negative. PE’s don’t make
sense in this case
Current PE are generally lower than the trailing PE indicates that analysts
expectations are more optimistic
On NASDAQ, high technology companies would like to keep the earning in
the company to let it grow rather than paying dividends
In 2002, Japan markets was at the bottom
Capital gains tax rates are lower than dividend payment rates for investors
Question 3
Refer to Shiller’s paper(1998).
Http://www.econ.yale.edu/~shiller
Question 4
Refers to handout page 18. Do you consider other factors that explain if the current
market has corrected sufficiently?