1. Mr. George, a stock market investor, is interested to analyze the general behavior of the stock market in the USA. For this purpose, he has decided to use several methods of constructing the stock market index. Upon careful analysis of different sectors enterprises listed in the US stock market, he decided to include a sample of six stocks in index construction that are representatives of the universe of the stock market in the US. Further, he plans to use July 15, 1995, his birthday, as the base and is interested in measuring the value of the average or the index on July 15, 2010, and July 15, 2016. He has found the closing prices for each of the six stocks, 1 through 6, on each of the three dates. Note that the number of shares outstanding as on July 15, 1995, is 1000 shares for each stock 1 through 3, and 2000 shares for each stock 4 through 6. Assume that number of outstanding shares of these stocks did not change since the base period.

Stock Closing stock price July 15, 2016

Closing stock price

July 15, 2010

Closing stock price

July 15, 1995

1

2

3

4

5

6

$360

320

200

780

1020

320

350

360

430

500

710

220

150

200

220

210

425

340

On the basis of stock price data for six stocks on three dates, you are required to work out the stock market index under the following situations:

1. Assume that six stocks did not announce stock dividends and split since the base period. What are the market averages, using the same methodology used to calculate the Dow average, on three dates? What is the value of weighted market indexes, using the same methodology used to calculate the US Stock exchange, on three dates?
2. Use your findings to describe the general market condition bull or bear- that existed between July 15, 2010, and July 2016.
3. Calculate the percentage change in the average and index value between July 15, 2010, and July 15, 2016. Why do they differ?
4. Do you think that the market average is affected by stock dividends and split announcements? What effect does it have on the value-weighted market index?