In addition to price-weighted and value-weighted indexes, an equally weighted in

Question

In addition to price-weighted and value-weighted indexes, an equally weighted index is one in which the index value is computed from the average rate of return of the stocks comprising the index. Equally weighted indexes are frequently used by financial researchers to measure portfolio performance.

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):

Compute the rate of return on an equally weighted index of the three defense stocks for the year ending December 31, 2010. (Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

If the index value is set to 100 on January 1, 2010, what will the index value be on January 1, 2011? (Round your answer to 2 decimal places.)

What is the rate of return on the index for 2011? (Round your answer to 2 decimal places. Omit the "%" sign in your response.

In addition to price-weighted and value-weighted indexes, an equally weighted index is one in which the index value is computed from the average rate of return of the stocks comprising the index. Equally weighted indexes are frequently used by financial researchers to measure portfolio performance.

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):

Explanation / Answer

Part A

If all the stocks have the same weights, the value of index would be the average of prices

Beginning index = (94+36+65)/3 =65

Ending Index = (97 +31 +54)/3 = 60.67

Return = (Ending value – beginning value)/ Beginning value

                = (60.67 -65)/65

                = -6.66%

Part B

Ending index value = beginning index value x (1+ return)

                                      = 100 x (1+(-0.0666))

                                      = 93.34

Part C

Value of index at the end of 2011 =(111+45+68)/3

                                                                   =74.67

Return = (74.67-60.67)/60.67

                = 23.07%

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.