The following three defense stocks are to be combined into a stock index in Janu
ID: 2757763 • Letter: T
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
Shares Price Weighted Index Price Weighted Index Price Weighted Index (millions) 1/1/2010 1/1/2010 1/1/2011 1/1/2011 1/1/2012 1/1/2012 a b a*b c a*c d a*d Douglas McDonnell 425 $72.00 $30,600.00 $75.00 $31,875.00 $92.00 $39,100.00 Dynamics General 530 $50.00 $26,500.00 $43.00 $22,790.00 $57.00 $30,210.00 International Rockwell 310 $79.00 $24,490.00 $68.00 $21,080.00 $85.00 $26,350.00 Total $81,590.00 $75,745.00 $95,660.00 a. Initial Index Value = $81,590 million b. Return for 2010 = (Index Value as on 1/1/2011 - Index Value 1/1/2010) / Index Value 1/1/2010 = 75,745 - 81,590 / 81, 590 = -5,845 / 81,590 = -7.16% c. Return for 2011 = (Index Value as on 1/1/2012 - Index Value 1/1/2011) / Index Value 1/1/2011 = 95,660 - 75,745 / 75,745 = 19,915 / 75,745 = 20.82%
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