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 2016 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance): Price Shares (millions) 1/1/16 1/1/17 185 $ 69 $ 72 450 47 40 270 76 65 1/1/18 $ 85 Douglas McDonnell Dynamics General International Rockwell 54 a. Calculate the initial value of the index if a price-weighting scheme is used. Index value b. What is the rate of return on this index for the year ending December 31, 2016? For the year ending December 31, 2017? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) 2016 return 2017 return

Explanation / Answer

a. Calculate the ini±al value of the index if a price-weighting scheme is used.

1/1/16: Index Value = (69+47+76)/3=64.00

b.What is the rate of return on this index for the year ending December 31,2016? For the year ending

December 31, 2017?

1/1/17: Index value = ( 72+40+65)/3=59.00

2016 return= (59.00-64.00) /64.00= -7.81%

1/1/18: Index value = (85+54+79)/3=72.67

2017 return = (72.67-59.00)/59.00= 23.16%

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