Question

In addition to price-weighted and value-weighted indexes, an equally weighted index is one in which the index value is computed from the average rate of return of the stocks comprising the index. Equally weighted indexes are frequently used by financial researchers to measure portfolio performance.

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	345		$	94		$	97		$	109
Dynamics General	450			66			61			75
International Rockwell	310			95			84			101

a. Compute the rate of return on an equally weighted index of the three defense stocks for the year ending December 31, 2019. (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. If the index value is set to 100 on January 1, 2019, what will the index value be on January 1, 2020? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. What is the rate of return on the index for 2020? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

A equal weighted

stock share price 0 price 1 % changes

A 345 94 97 3.19

B 450 66 61 -7.58

C 310 95 84 -11.59

Sum:- -15.98

average -5.33

a:- Ans:- -5.33

B. If index was 100 on day 0. It would also 100 on day 1

1 ( 1+D%)=1

C. price weighted

stock share price 0 price1 %changes

A 345 97 109   

B 450 61 75

C 310 84 10

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Sum    242 285 17.77

average 5.92 Ans

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C2 value weigted

stock share MV 0 MV1 %changes

A 345 33465 37605     

B 450 27450 33750

C 310 26040 31310

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Sum 86955 102665 18.87 Ans

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C 3 equal weighted

stock share price 0 price1 %changes

A 345 97 109 12.37

B 450 61 75 22.95

C 310 84 10 20.23

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Sum    242 285 55.55%

Divided by 3 18.57 Ans

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