The following three defense stocks are to be combined into a stock index in Janu
ID: 2648993 • 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):
Price
Shares
(millions) 1/1/13 1/1/14 1/1/15
Douglas McDonnell 415 $ 84 $ 89 $ 106
Dynamics General 225 23 16 30
International Rockwell 350 52 41 55
a. Calculate the initial value of the index if a price-weighting scheme is used.
Index value
b.
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.)
2013 return %
2014 return %
Explanation / Answer
a. Calculate the initial value of the index if a price-weighting scheme is used.
Price-Weighted Index is the index of all stock based on its price per share & is calculated by adding the prices of all the stocks and then dividing it by total stocks.
Here initial value of the index will be based upon the price of 1/1/13 = [84+23+52] / 3 = 53
:- Index value = 53
b.
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.)
The Rate of return of the year will be the change in the Price-Weighted Index compare to previous year in terms of Percentage -
2013 return % would be the changes in Index at the Beginning of 2014 compare to 2013
2014 return % would be the changes in Index at the Beginning of 2015 compare to 2014
Price-Weighted Index 2013 = 53 ( calculated in a)
Price-Weighted Index 2014 = [89+16+41] / 3 = 48.67
Price-Weighted Index 2015 = [89+16+41] / 3 = 63.67
2013 return % = 48.67% / 53% - 1 = -8.18
2014 return % = 63.67% / 48.67% -1 = 30.82
Shares (millions) 1/1/13 1/1/14 1/1/15 Douglas McDonnell 415 84 89 106 Dynamics General 225 23 16 30 International Rockwell 350 52 41 55 Total 159 146 191 Total / 3 53.00 48.67 63.67 Difference/Change in Index Wrt to Previous Year -4.33 15.00 % Difference/Change in Index Wrt to Previous Year -8.2% 30.8%Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.