The following three defense stocks are to be combined into a stock index in Janu

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

Solution -

a ) Index Value = 53

b) 2013 return   % = -8.2%

   2014 return   % = 30.8 %

                       Shares (millions)   1/1/13 1/1/14 1/1/15 a Douglas McDonnell 415 84 89 106 b Dynamics General 225 23 16 30 c International Rockwell 350 52 41 55 A Total of Prices ( a+b+c) 159 146 191 P price-weighting Index = A / 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%

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