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). Assume the index is scaled by a factor of 10 million; that is, if the total value of all firms in the market is $5 billion, the index would be quoted as 500.

   

Calculate the initial value of the index if a value-weighting scheme is used. (Round your answer to 2 decimal places.)

What is the rate of return on this index for the year ending December 31, 2013? For the year ending December 31, 2014? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

rev: 11_17_2014_QC_58489

Price Shares
(millions) 1/1/13 1/1/14 1/1/15   Douglas McDonnell 340    $ 103    $ 106    $ 118      Dynamics General 450    45    39    53      International Rockwell 410    74    63    79   

Explanation / Answer

a. Initial value of the index = shares*price/100
=(340*103+450*45+410*74)millions/100
=85610000000/1 billion
=85.61

b.
The rate of return on this index for the year ending December 31, 2013
= (340*106+450*39+410*63) - previous year market value / previous year market value
=79420-85610/85610
=-7.23

The rate of return on this index for the year ending December 31, 2014
= (340*118+450*53+410*79) - previous year market value / previous year market value
=96360-79420/79420
=21.33

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