The following three defense stocks are to be combined into a stock index in Janu

Question

The following three defense stocks are to be combined into a stock index in January 2013 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance):

a. Calculate the initial value of the index if a price-weighting scheme is used.

b. What is the rate of return on this index for the year ending December 31, 2013? For the year ending December 31, 2014?

Price Shares (Millions) 1/1/13 1/1/14 1/1/15 Douglas McDonnell 205 103 109 123 Dynamics General 450 48 44 58 International Rockwell 290 77 66 80

Explanation / Answer

The total value Value of the index for 1/1/13 = 103+48+77=228/3=76 initial index value

following the same step we find the initial index value for the other years 1/1/14 109+44+66=219/3 =73

B)Rate of return on index for Dec 31 2013

=103+48+77=228/3=76 index value for 1/1/13

Adding closing stock value 109+44+66=219/3= 73 index value on 1/1/14

  Subtract the starting index value from the ending index value to figure the numerical gain or loss on the investment. In this case its a loss. since 73-76=(3)

Divide the gain or loss by the initial value to figure the rate of return for the index. 3/76*100=3.94% loss

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