Question

- Problem 5-7 Index Level (LO4, CFA2)

You are given the following information concerning two stocks that make up an index. Assume the value-weighted index level was 211.98 at the beginning of the year. What is the index level at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

					Price per Share
	Shares Outstanding				Beginning of Year				End of Year
Kirk, Inc.		34,000			$	54			$	61
Picard Co.		32,500				79				85

Index Level = ______

- Problem 5-14 Price-Weighted Indexes (LO4, CFA2)

The following three defense stocks are to be combined into a stock index in January 2019 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance):

		Price
	Shares (millions)		1/1/19			1/1/20			1/1/21
Douglas McDonnell	200		$	70		$	73		$	87
Dynamics General	300			51			46			60
International Rockwell	390			80			69			86

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, 2019? For the year ending December 31, 2020? (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.)

2019 Return = ______%

2020 Return = ______%

Answer 1

1. You are given the following information concerning two stocks that make up an index. Assume the value-weighted index level was 211.98 at the beginning of the year. What is the index level at the end of the year?

Index Level = (end of year value/Beginning of year value) * Beginning index value

Index Level = (34000*61 + 32500 * 85)/(34000 * 54 + 32500 * 79) * 211.98

Index Level = 1.0983 * 211.98

Index Level = 232.82

2. The following three defense stocks are to be combined into a stock index in January 2019 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance):

a. Index value = average of prices = (70 + 51 + 80) / 3

Initial Index value = 67

b. 2019 return = (average of prices in 2020 / initial index value) - 1

2019 return = ((73+46+69)/3 / 67) - 1

2019 return = (62.67 / 67) - 1

2019 return = -6.47%

2020 return = (average of prices in 2021 / average of prices in 2020) - 1

2020 return = ((87+60+86)/3 / 62.67) - 1

2020 return = (77.67 / 62.67) - 1

2020 return = 1.2394 - 1

2020 return = 23.94%