In addition to price-weighted and value-weighted indexes, an equally weighted in
ID: 2382880 • Letter: I
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 2013 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance):
a.Compute the rate of return on an equally weighted index of the three defense stocks for the year ending December 31, 2013.
b.If the index value is set to 100 on January 1, 2013, what will the index value be on January 1, 2014?
c.What is the rate of return on the index for 2014?
(need help mostly with b & c)
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 2013 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance):
Price Shares (in millions) 1/1/13 1/1/14 1/1/15 Douglas 215 $64 $68 $82 Dynamic 455 72 64 78 International 250 101 90 106a.Compute the rate of return on an equally weighted index of the three defense stocks for the year ending December 31, 2013.
b.If the index value is set to 100 on January 1, 2013, what will the index value be on January 1, 2014?
c.What is the rate of return on the index for 2014?
(need help mostly with b & c)
Explanation / Answer
a. Rate of return on an equally weighted index of the three defense stocks for the year ending December 31, 2013. Douglas Dynamic International Total Rate of return/share' (68-64)/64 (64-72)/72 (90-101)/101 ie. 0.0625 -0.1111 -0.1089 No.of shares in MN 215 455 250 920 Product 13.4375 -50.5556 -27.2277 -64.3458 Weighted rate of return= -64.3458/920 -0.06994 ie. -6.99% b. If the Index value is set to 100 on Jan.1,2013, Index value on Jan.1,2014, will be decreased by 6.99 ie. 100-6.99= 93.01 c.Rate of return on the index for 2014 Douglas Dynamic International Total Rate of return/share' (82-68)/68 (78-64)/64 (106-90)/90 ie. 0.2059 0.2188 0.1778 No.of shares in MN 215 455 250 920 Product 44.2647 99.5313 44.4444 188.2404 Weighted rate of return= 188.2404/920 0.204609 ie. 20.46% Index for 2014 93.01 Rate of return as above 20.46% Rate of return on this index= 93.01*20.46% = 19.029846 ie. 19.03%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.