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The following three defense stocks are to be combined into a stock index in January 2016...

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 1/1/18
Douglas McDonnell 345 $ 94 $ 97 $ 109
Dynamics General 450 66 61 75
International Rockwell 310 95 84 101

a. Calculate the initial value of the index if a price-weighting scheme is used.

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.)

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Expert Solution

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A. Value of Index is 85.

B. Rate of return for year ending December 31, 2016 is -5.1%.

Rate of return for year ending December 31, 2017 is 17.77%.

Shares Shares (in Mn) 01-01-2016 01-01-2017 01-01-2018
Douglas Mc donnel                      345                94                97              109
Dynamic General                      450                66                61                75
International Rockwell                      310                95                84              101
Sum of Prices (sum of 3 shares prices) (A)              255              242              285
Price Weighted Index Value (A/3)                85                81                95
Returns (81-85), (95-81)                 -4                14
Returns % (-4/85), (14/81) -5.10% 17.77%

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jeff jeffy answered 1 year ago
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