To put the turnover of Figure 13.3 into perspective, let’s do a back of the envelope calculation of what an individual investor’s average turnover (per dollar invested) would be were he or she to follow a policy of investing in the S&P 500 portfolio. Because the portfolio is value weighted, trading would be required when Standard and Poor’s changes the constituent stocks. (Let’s ignore additional, but less important reasons like new share issuances and repurchases.)

Assuming they change 23 stocks a year (the historical average since 1962) what would you estimate the investor’s per stock share turnover to be? Assume that the market capitalization of the stocks that are added and deleted from the index are equal to the average market capitalization of all stocks in the index.

Appendix