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):

		Price
	Shares (millions)		1/1/16			1/1/17			1/1/18
Douglas McDonnell	180		$	60		$	64		$	77
Dynamics General	325			68			64			78
International Rockwell	370			97			86			100

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

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

Answer 1

In price weighted index, price of all shares are added togethN32er to create initial value of index.
	1/1/16	1/1/17	1/1/18
Douglas McDonnell	60	64	77
Dynamics General	68	64	78
International Rockwell	97	86	100
	225	214	255
(a) Initial value of index is $225 when using price weighting system.
(b) Year 2016 return = (Closing value of index - opening value of index)/Opening value of index
	(214 -225)/225
	-4.89%
Year 2017 return	(255-214)/214
	19.16%
So, Year 2016 return is -4.89% and year 2017 return is 19.16%.