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). 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.

		Price
	Shares (millions)		1/1/16			1/1/17			1/1/18
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 value-weighting scheme is used. (Round your answer to 2 decimal places.)

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.)

Answer 1

			N	P1	N*P1	P2	N*P2	P3	N*P3
				Price	Price* Shares($million)	Price	Price* Shares($million)	Price	Price* Shares($million)
			Shares	1/1/2016	1/1/2016	1/1/2017	1/1/2017	1/1/2018
			(millions)						1/1/2018
		Douglas McDonnell	200	$70	$14,000	$73	$14,600	$87	$17,400
		Dynamics General	300	$51	$15,300	$46	$13,800	$60	$18,000
		International Rockwell	390	$80	$31,200	$69	$26,910	$86	$33,540
				SUM	$60,500	SUM	$55,310	SUM	$68,940
	A	Total market value as on 1/1/2016	$60,500	million
	B	Total market value as on 1/1/2017	$55,310	million
	C	Total market value as on 1/1/2018	$68,940	million
	D=A/10	Value of index on 1/1/2016	6,050
	E=B/10	Value of index on 1/1/2017	5,531
	F=C/10	Value of index on 1/1/2018	6,894
	R1=(E/D)-1	Rate of Return for the year ending Dec 31, 2016	-8.58%
	R2=(F/E)-1	Rate of Return for the year ending Dec 31, 2017	24.64%