The following three defense stocks are to be combined into a stock index in Janu
ID: 2382985 • Letter: T
Question
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). Assume the index is scaled by a factor of 10 million; that is, if the total value of all firms in the market is $5 billion, the index would be quoted as 500.
Calculate the initial value of the index if a value-weighting scheme is used. (Round your answer to 2 decimal places.)
What is the rate of return on this index for the year ending December 31, 2013? For the year ending December 31, 2014? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Price Shares(millions) 1/1/13 1/1/14 1/1/15 Douglas McDonnell 340 $ 103 $ 106 $ 118 Dynamics General 450 45 39 53 International Rockwell 410 74 63 79
Explanation / Answer
a. Calculate the initial value of the index if a value-weighting scheme is used.
Total Value of Firm in 1/1/13 = 340*103 + 450*45 + 410*74
Total Value of Firm in 1/1/13 = 85610 Million
Initial value of the index = Total Value of Firm in 1/1/13/ index factor
Initial value of the index = 85610/10
Initial value of the index = 8561
b. What is the rate of return on this index for the year ending December 31, 2013? For the year ending December 31, 2014?
Total Value of Firm in 1/1/14 = 340*106 + 450*39 + 410*63
Total Value of Firm in 1/1/14 = 79420 Million
Value of the index in 1/1/14 = Total Value of Firm in 1/1/14/ index factor
Value of the index in 1/1/14 = 79420/10
Value of the index in 1/1/14 = 7942
Rate of return on this index for the year ending December 31, 2013 = (Value of the index in 1/1/14 - Initial value of the index)/Initial value of the index
Rate of return on this index for the year ending December 31, 2013 = (7942-8561)/8561
Rate of return on this index for the year ending December 31, 2013 = - 7.23%
Total Value of Firm in 1/1/15 = 340*118 + 450*53 + 410*79
Total Value of Firm in 1/1/15 = 96360 Million
Value of the index in 1/1/15 = Total Value of Firm in 1/1/15/ index factor
Value of the index in 1/1/15 = 96360/10
Value of the index in 1/1/15 = 9636
Rate of return on this index for the year ending December 31, 2014 = (Value of the index in 1/1/15 -Value of the index in 1/1/14)/Value of the index in 1/1/14
Rate of return on this index for the year ending December 31, 2014 = (9636-7942)/7942
Rate of return on this index for the year ending December 31, 2014 = 21.33%
Answer
2013 return -7.23% 2014 return 21.33 %Related Questions
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