P3.4 Mamta Singh wishes to develop an average or index that can be used to measure the general behaviour of share prices over time. She has decided to include six closely followed, highquality shares in the average or index. She plans to use 15 August 1978, her birthday, as the base and is interested in measuring the value of the average or index on 15 August 2001 and 15 August 2010. She has found the closing prices for each of the six shares, A to F, at each of the three dates and has calculated a divisor that can be used to adjust for any share splits, company changes and so on that have occurred since the base year, which has a divisor equal to 1.

Closing Share Price Share 15 August 2010 15 August 2001 15 August 1978 A $4.60 $4.00 $5.00 B 3.70 3.60 1.00 C 2.00 2.30 0.70 D 5.90 6.10 2.60 E 8.20 7.00 4.50 F 3.20 3.00 3.20 Divisor 0.70 0.72 1.00 Note: The number of shares outstanding has remained unchanged at each of the three dates.

Therefore, the closing share prices will behave identically to the closing market values.

a. Using the data given in the table, calculate the market average, using the same methodology used to calculate the Dow averages, at each of the three dates—15 August 1978, 2001 and 2010.

b. Using the data given in the table and assuming a base index value of 10 on 15 August 1978, calculate the market index, using the same methodology used to calculate the S&P indices, at each of the three dates.

c. Use your findings in parts a and b to describe the general market condition—bull or bear—that existed between 15 August 2001 and 15 August 2010.

d. Calculate the percentage changes in the average and index values between 15 August 2001 and 15 August 2010. Why do they differ?