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 2010 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance):

What is the rate of return on this index for the year ending December 31, 2010? For the year ending December 31, 2011? (Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Price Shares
(millions) 1/1/10 1/1/11 1/1/12   Douglas McDonnell 535 $ 89 $ 94 $ 109   Dynamics General 450 70 65 79   International Rockwell 230 99 88 105

Explanation / Answer

a. Calculation of initial value of Index

Number of shares * Per share price

(535*89) + (450*70) + (230*99)

Initial value of Index =101,885

b. Calculation of Rate of Return on this index

For the year 2010

Index will be calculated on the same manner as above by taking share value of Jan 2011.

Index Value for December 2010 = 99,780

Return = 99,780 - 101885/ 101885

2010 Return = -2.07%

Return for the year 2011

Index for the year 2011 = 118,015

Return = 118015-99780/99780

2011 Return = 18.28%

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