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FINM7008 Applied Investments

Semester 1, 2023

Workshop 1

(Questions from a prior mid-semester exam)

a)    Consider a market that consists of three stocks, for which you have the following data on prices and the quantities of shares outstanding, at t=0 and t=1, respectively:

i)   If Alpha Ltd splits two for one during the period, what is the rate of return on a price- weighted index consisting of the three stocks?

ii)  Calculate the rate of return over the period of an equally weighted index consisting of the three stocks (assume Alpha Ltd splits 2 for 1).

iii) Calculate the rate of return over the period, of a market value weighted index of the three stocks.

b)   You are interested in investing in Argos Ltd, and have received the following excerpt from the order book:

i)   What is the bid-ask spread for Argos Ltd?

ii)  You would like to purchase 1000 shares in Argos at a price of $24.75 per share. Explain how your order would be reflected in the order book, once placed.

iii)  How much would you pay for 1000 shares in Argos Ltd, if instead you placed a market order to buy the shares?

c)    What is an exchange-traded fund (ETF)? What are some of the advantages associated with investing in ETFs rather than a conventional mutual fund?