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): Calculate the initial value of the index if a price-weighting scheme is used. 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

Price weighted index is just the simple arithmatic average of the prices of all the stocks in index.

a. index value will be = (70+51+80 )/ 3 = 201 / 3 = 67

b. Index value at the beginning of 2013 = 67

Index value at the beginning of 2014 = (73+46+69) / 3 = 62.67

Index value at the beginning of 2015 =(87+60+86) / 3= 77.67

2013 return = Index value at the beginning of 2014 / Index value at the beginning of 2013 -1

= (62.67/67) -1 = - 6.47%

2014 return = Index value at the beginning of 2015 / Index value at the beginning of 2014 -1

= (77.67/62.67) -1 = 23.94%

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