You have the following data on three stocks shown below. You decide to use the data on these stocks to form an index, and 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.

Question

Quizplus · Accepted Answer

The S&P 500 Index return is calculated using a market value-weighted average. To find the average earned rate of return for the index, calculate the weighted average of the returns of the stocks based on their market values at the beginning of the year.

You Have the Following Data on Three Stocks Shown Below