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 2016 (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 Douglas McDonnell Dynamics General International Rockwell Shares (millions ) 1/1/16 545 $ 80 460 70 190 1/1/17 $ 83 63 88 1/1/18 $ 98 77 102 99 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, 2016? For the year ending December 31, 2017? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) 2016 return 2017 return

Explanation / Answer

(a) Calculation of Initial value of Index Shares in Millions price at 01/01/2016 Totla value in Millions $ Douglass McDonnel 545 $                              80.00 $                                 43,600 Dynamics general 460 $                              70.00 $                                 32,200 International Rockwell 190 $                              99.00 $                                 18,810 Total Value of Portfolio $                                 94,610 Value of index is =$94610 Millions /$10 Millions =9461 (a) rate of return on the index for the year ending dec2016 and dec2017 Shares in Millions price at 01/01/2017 Totla value in Millions $ price at 01/01/2018 Totla value in Millions $ Douglass McDonnel 545 $                              83.00 $                                 45,235 $                           98.00 $                                    53,410 Dynamics general 460 $                              63.00 $                                 28,980 $                           77.00 $                                    35,420 International Rockwell 190 $                              88.00 $                                 16,720 $                        102.00 $                                    19,380 Total Value of Portfolio $                                 90,935 $                                1,08,210 value of index 9093.5 10821 Opening index 9461 9093.5 Return on the Index -367.5 1727.5 rate of return = Return/ opening Value of index -3.88% 19.00%    -367.50/9761 1727.5/9093.50 rate of retun for the Holding period = (10821-9461)/9461 =1360/9461 =0.1437 =14.37%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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