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.

Suppose 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):

What is the percentage rate of return on this index for the year ending December 31, 2016?

(Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Price Shares
(millions) 1/1/16 1/1/17 1/1/18   Douglas McDonnell 540    $ 62    $ 62    $ 81      Dynamics General 455    49    46    57      International Rockwell 290    78    85    81   

Explanation / Answer

% return on Douglas = 0

% return on Dynamics = 46/49 - 1 = -6.1224%

% return on International = 85/78 - 1 = 8.9744%

% return on this index = (-6.1224 + 8.9744)%/3 = 0.95 %

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