Question

In: Finance

Calculate the percentage returns generated over the past five years by the following three indices: TSX...

Calculate the percentage returns generated over the past five years by the following three indices: TSX Composite, Dow Jones Industrial Average (DJIA), and S&P 500. Use the Globe Investor website to chart and estimate the returns. Choose an index, then view the five-year chart by clicking on the 5Y link above the chart. Hover your cursor on the beginning and ending of the graph line to see the price (this feature may not work in Internet Explorer). Once you have the beginning and ending values, use the formula (End Price – Beginning Price)/Beginning Price to calculate the total percentage return over the five-year period. Show your calculations, contrast the results, and discuss possible reasons for the differences between indices.

Expert Solution

The returns for 3 different indices using global investor data are as follows

1) TSX Composite

Beginning Price = 19.78 CAD

End price = 20.66 CAD

Return in % = ((20.66-19.78)/19.78)*100 which is

= (0.88/19.78*100)

=4.45%

2) Dow Jones Industrial Average

Beginning Price = $17,760.41

End price = $ 25,553.80

Return in % = ((25553.80-17760.41)/17760.41)*100 which is

=(7793.39/17760.41)*100

=43.88%

3) S&P 500

Beginning Price = $2,076.62

End price = $ 3,065.46

Return in % = ((3065.46-2076.62)/2076.62)*100 which is

=(988.84/2076.62)*100

=47.62%

There is a contrast in the result. The first index is an ETF (Exchange traded fund) which tracks an index. Its NAV is calculated daily. During the last 5 years the ETF has been quite volatile suggesting the index has been volatile because of either macroeconomic or micreconomic conditions or both.

While the latter 2 is an equity fund representing the performance of American companies. Both the index give an overall picture of the economy. The Dow jones Industrial average has 30 stocks mostly of manufacturing companies as the name suggest industrial. It started trading earlier than S&P 500. On the other hand S&P 500 comprises 500 stocks covering not only manufacturing but also technology stocks, pharma stocks etc.

Based on the above result although in unprecendented time right now an investor would be better off by investing money into equity indices (Dow Jones Industrial Average and S&P 500 )rather thsn an ETF (TSX index).

Investing into ETF will give investor an exposure into a particular index which itself is tracking a certain sector and not the entire economy. Here TSX index is tracking a certain sector and not covering the entire economy suggesting that the concerned sector has not performed well over a given time period compared to other 2 indicies.

jeff jeffy answered 1 year ago

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