Answer: 109.2.

## Explanation For an equal-weighted index that is **not rebalanced**, we need to calculate the price return of each stock and then compute the average return to determine the index value change. ### Step 1: Calculate individual stock returns **Stock 1:** - Beginning price: €30 - Ending price: €36 - Return = (36 - 30) / 30 = 6/30 = 0.20 or 20% **Stock 2:** - Beginning price: €50 - Ending price: €45 - Return = (45 - 50) / 50 = -5/50 = -0.10 or -10% **Stock 3:** - Beginning price: €40 - Ending price: €50 - Return = (50 - 40) / 40 = 10/40 = 0.25 or 25% ### Step 2: Calculate average return Since this is an equal-weighted index, we take the simple average of the returns: Average return = (20% + (-10%) + 25%) / 3 = (35%) / 3 = 11.6667% ### Step 3: Calculate ending index value Beginning index value = 100 Ending index value = Beginning index value × (1 + average return) Ending index value = 100 × (1 + 0.116667) = 100 × 1.116667 = 111.6667 ≈ 111.7 **However, this is incorrect!** This calculation assumes the index is rebalanced to maintain equal weights. Since the index is NOT rebalanced, we need to calculate the actual portfolio return based on the initial equal-weighted investment. ### Step 4: Correct calculation for non-rebalanced equal-weighted index For an equal-weighted index that is not rebalanced, we need to: 1. Assume equal dollar amounts invested in each stock at the beginning 2. Calculate the ending value of each investment 3. Sum the ending values and compare to the beginning total Let's assume we invest €100 in each stock (equal weighting): **Stock 1:** - Beginning investment: €100 - Shares purchased: 100 / 30 = 3.3333 shares - Ending value: 3.3333 × 36 = €120 **Stock 2:** - Beginning investment: €100 - Shares purchased: 100 / 50 = 2 shares - Ending value: 2 × 45 = €90 **Stock 3:** - Beginning investment: €100 - Shares purchased: 100 / 40 = 2.5 shares - Ending value: 2.5 × 50 = €125 **Total beginning investment:** €300 **Total ending value:** 120 + 90 + 125 = €335 **Portfolio return:** (335 - 300) / 300 = 35/300 = 0.116667 or 11.6667% **Ending index value:** 100 × (1 + 0.116667) = 111.6667 ≈ 111.7 Wait, this gives the same result! Let me reconsider... Actually, for an equal-weighted index that is NOT rebalanced, the calculation is different. The key insight is that without rebalancing, the weights drift from their initial equal weights. The return calculation should be based on the actual portfolio composition at the beginning. Let me calculate it properly: **Beginning index composition:** Total market cap at beginning: - Stock 1: 30 × 500 = €15,000 - Stock 2: 50 × 200 = €10,000 - Stock 3: 40 × 300 = €12,000 - Total: €37,000 **Ending market cap:** - Stock 1: 36 × 500 = €18,000 - Stock 2: 45 × 200 = €9,000 - Stock 3: 50 × 300 = €15,000 - Total: €42,000 **Price return index (not rebalanced):** Return = (42,000 - 37,000) / 37,000 = 5,000 / 37,000 = 0.135135 or 13.5135% **Ending index value:** 100 × (1 + 0.135135) = 113.5135 ≈ 113.5 This matches option C: 113.5 **Why the initial approach was wrong:** The initial approach of averaging individual returns only works if the index is rebalanced to maintain equal weights. Without rebalancing, we need to calculate the actual portfolio return based on the initial weights, which for an equal-weighted index means equal dollar amounts invested in each stock at the beginning. However, since the question provides share counts, we should use the actual market capitalization approach. **Correct Answer: C (113.5)**