You are working as a portfolio manager for a company in which your benchmark performance will be assessed based upon the performance of three defense stocks you are entrusted with managing. The following stocks comprise the index as of January 1, 2016:

	Shares	Price
	(millions)	1/1/16	1/1/17	1/1/18
Douglas McDonnell	340	$103	$106	$118
Dynamics General	450	45	39	53
International Rockwell	410	74	63	79

Based on the information above, answer the following questions under the assumption a price-weighted index is used:

1. Calculate the initial value of the price-weighted index.

2. Calculate the rate of return on this price-weighted index for the years ending December 31, 2016 and December 31, 2017.

3. Suppose Douglas McDonnell enacts a 3-for-1 split on January 1, 2017. What is the new divisor for the price-weighted index?

4. Under the assumption Douglas McDonnell enacts a 3-for-1 split on January 1, 2017, what rate of return did the price-weighted index earn for the year ended December 31, 2017 assuming Douglas McDonnells share price was $39.33 per share?

Now suppose instead of a price-weighted index, a value-weighted index is used.

5. What does the initial value of the index change to?

6. Re-compute the rate of return for the years ending December 31, 2016 and December 31, 2017 assuming a value-weighted index is used.

7. Using a value-weighted index, does it matter whether or not the Douglas McDonnell stock split occurred with regard to index values and returns? Why or why not?