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.

a. Using the information in Problem 14, compute the rate of return on an equally weighted index of the three defense stocks for the year ending December 31, 2022.

b. If the index value is set to 100 on January 1, 2022, what will the index value be on January 1, 2023? What is the rate of return on the index for 2023?

Problem 14

Suppose the following three defense stocks are to be combined into a stock index in January 2022 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for their performance):

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Douglas McDonnell Dynamics General International Rockwell Shares (millions) 340 450 410 1/1/22 $103 45 74 Price 1/1/23 $106 39 63 1/1/24 $118 53 79