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Forming a stock index

You have accumulated data on three stocks (see below). You have decided to use the information on these stocks to form an index. You want to find the average earned rate of return for 2011 on your index. If you follow the averaging procedure used to calculate the S&P 500 Index return, what would your index's rate of return be? Hints: Rates of return are based on beginning-of-year prices, and the S&P Index is weighted by market values of the companies in the index.

Stock Dividend Beginning Price Ending Price Sharing Outstanding (millions)
A $1.50 $30.00 $32.00 5.00
B $2.00 $28.50 $27.00 4.50
C $0.75 $20.00 $24.00 20.00

Solution Preview

Dear Student:

The computations for this problem are in the attached Excel file. Please open the Excel file and then follow the clarifying explanations below:

The columns A-E include the given information, and columns F-H include the computation of the return of each stock. The information in columns F-H is for your information only; it is not needed to calculate the index.

Column I includes the calculation of the weight of each stock in the index, based on the number of shares outstanding (5, 4.5, and 20 million, respectively) divided by the total number of shares (29.5 million shares).

Columns J and K ...

Solution Summary

The stock dividends beginning price ending price sharing outstanding are determined.