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 2010 (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 average firm’s market value is $5 billion, the index would be quoted as 500.

What is the rate of return on this index for the year ending December 31, 2010? For the year ending December 31, 2011? (Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places. Omit the "%" sign in your response. )

The following three defense stocks are to be combined into a stock index in January 2010 (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 average firm’s market value is $5 billion, the index would be quoted as 500.

Explanation / Answer

a)

Initial value of the index = (72*425+50*530+79*310)/3 * 1/10

Initial value of the index = 2720

b)

Index for the year ending December 31, 2010= (75*425 + 43*530 + 68*310)/3 * 1/10

Index for the year ending December 31, 2010= 2525

Rate of Return for the year ending December 31, 2010 = (2525-2720)/2720

Rate of Return for the year ending December 31, 2010= -7.17%

Index for the year ending December 31, 2011= (92*425 + 57*530 + 85*310)/3 * 1/10

Index for the year ending December 31, 2011= 3189

Rate of Return for the year ending December 31, 2011 = (3189-2525)/2525

Rate of Return for the year ending December 31, 2011= 26.30%

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