Chapter 9 Activity Stock Indexes From the textbook: Stock market indexes are designed to show the performance of the stock market. However, there are many stock indexes, and it is difficult to determine which index best reflects market actions The three indexes below are used as a benchmark for comparing individual stocks with the overall market, for measuring the trend in stock prices over time, and for determining how various economic factors affect the market. Answer the questions about the three major stock indexes below by performing your own independent research. Dow Jones Industrial Average (DJIA)

1. How many companies comprise the DJIA, and how are the companies selected?

2. Explain what the Dow Divisor is. Why does it exist?

3. The DJIA uses a price-weighted method to calculate its index value. What does this mean (how does it work)?

4. Describe the major criticisms of the DJIA. Standard & Poors 500 Index (S&P 500)

5. How many companies comprise the S&P 500, and how are the companies selected?

6. The S&P 500 uses a market-capitalization weighted method to calculate its index value. What does this mean (how does it work)? NASDAQ Composite Index (NASDAQ)

7. How many companies comprise the NASDAQ Index, and how are the companies selected?

8. How is the value of the NASDAQ Index calculated? General Questions

9. What are the current index values for the DJIA, S&P 500, and NASDAQ?

10. Market-capitalization method indexes are generally viewed as superior to price-weighted indexes. Despite that, the DJIA still has a very strong following and is often used to discuss the financial health of the US economy. Why do you think this is?

11. While generally considered superior to price-weighted indexes, market-capitalization indexes do not come without their own issues. What are some of the dangers/drawbacks to such indexes?

12. On June 16, 1995, the DJIA closed at $4,510.79. Assume the index lost 135 points on the next trading day. Compare that to a 500-point loss against the current level of the DJIA. Which occurrence would be more impactful? (find the percent change in the index on each day before answering) The % change in DIJA = 135/4510.79 = 2.99% Today the price is $26,584.77 Today % change in DIJA = 500/26,584.77 = 2.04% The percentage drop in 1995 is more impactful because it has a much higher percentage.

13. What does your answer from #12 tell you about point movements on indexes compared to percent changes?

14. Which index is the best metric? Explain why.

15. Do you think too much, too little, or the right amount of attention is paid to stock indexes? Why? Can you think of a better metric that would better gauge the financial health of the US economy?