The market value–weighted index return is calculated by computing the increase in value of the stock portfolio. The portfolio of the two stocks starts with an initial value of $100 million $500 million $600 million and falls in value to $110 million $400 million $510 million, a loss of 90/600 .15, or 15%. The index portfolio return is a weighted average of the returns on each stock with weights of 1 6 on XYZ and 5 6 on ABC (weights proportional to relative investments).

Because the return on XYZ is 10%, while that on ABC is 20%, the index portfolio return is

(1 )

6 10 ( ) 5 6 ( 20) 15%, equal to the return on the market value–weighted index. LO.1