The following three defense stocks are to be combined into a stock index in January...
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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 | ||||||||||
| Shares (millions) | 1/1/16 | 1/1/17 | 1/1/18 | |||||||
| Douglas McDonnell | 425 | $ | 72 | $ | 75 | $ | 92 | |||
| Dynamics General | 530 | 50 | 43 | 57 | ||||||
| International Rockwell | 310 | 79 | 68 | 85 | ||||||
a. Calculate the initial value of the index if a value-weighting scheme is used. (Round your answer to 2 decimal places.)
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.)
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