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). 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.

    Price
   
    Shares
(millions)      1/1/13        1/1/14        1/1/15
Douglas McDonnell   355       $   86       $   91       $   103   
Dynamics General   455          55          52          66   
International Rockwell   270          84          73          87   

a.  
Calculate the initial value of the index if a value-weighting scheme is used. (Round your answer to 2 decimal places.)

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) Calculation of initial value of the Index.

Total value of Shares = 30530 + 25025 + 22680 = 78235 million

(Note: 355*86 = 30530 Others can be calculated in the same manner)

Initial Value of Index = 78235/10 = 7823.5

b.) 2013 return

Index Value for 2013 December = 7567.5 (Calculated in the same manner as above)

Return = 7567.5 - 7823.5 / 7823.5 = -3.27

2014 Return

Index value for 2014 December = 9008.5

Return = 9008.5 - 7567.5/ 7567.5 = 19.04

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