In addition to price-weighted and value-weighted indexes, an equally weighted in
ID: 2382957 • 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):
Compute the rate of return on an equally weighted index of the three defense stocks for the year ending December 31, 2013. (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
If the index value is set to 100 on January 1, 2013, what will the index value be on January 1, 2014? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is the rate of return on the index for 2014? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
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):
Explanation / Answer
a. Index return for 2013 = [($114 - $108)/$108 * 100% + ($34 - $38)/$38 * 100% + ($56 - $67)/$67 * 100%] / 3
= [5.56% - 10.53% - 16.42%] / 3
= -7.13%
b. Index value on January 1, 2014 = 100 * (1 - 7.13%)
= 92.87
c. Index return for 2014 = [($131 - $114)/$114 * 100% + ($48 - $34)/$34 * 100% + ($70 - $56)/$56 * 100%] / 3
= [14.91% + 41.18% + 25.00%] / 3
= 27.03%
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