• University of Houston, Downtown

• FIN 4305  Chapter 3 

3.2 Imagine that Mini-Dow average (MDA) is based on the closing prices of five stocks. The
divisor used in the calculation of the MDA is currently .765. The closing prices for each of
the five stocks in the MDA today and exactly one year ago, when the divisor was .780, are
given in the accompanying table.
a. Calculate the MDA today and that of a year ago.

b. Compare the values of the MDA calculated in part a and describe the apparent
market behavior over the last year. Was it a bull or a bear market?
Bull market: rising prices, investor optimism, economic recovery, and government
stimulus.
Bear market: falling prices, investor pessimism, economic slowdown, and government
restraint.
The value of the MDA today is 59.88 points higher than one year ago (513.72-453.85); this
general upward trend indicates a bull (rising) market.
 

3.3 The SP-6 index (a fictitious index) is used by many investors to monitor the general behavior
of the stock market. It has a base value set equal to 100 at January 1,1978. In the
accompanying table, the closing market values for each of the six stocks included in the
index are given for three dates.
a. Calculate the value of the SP-6 index on both January 1, 2016, and June 30, 2016,
using the data presented here.
 

b. Compare the values of the SP-6 index calculated in part a and relate them to the
base index value. Would you describe the general market condition during the 6-
month period January 1 to June 30, 2016, as a bull or a bear market?
 

3.4 Deepa Chungi wishes to develop an average, or index, that can be used to measure the
general behavior of stock prices over time. She has decided to include six closely followed,
high-quality stocks in the average or index. She plans to use August 15, 1987, her birthday,
as the base and is interested in measuring the value of the average or index on August 15,
2013, and August 15, 2016. She has found the closing prices for each of the six stocks, A
through F, at each of the three dates and has calculated a divisor that can be used to adjust
for any stock splits, company changes, and so on that have occurred since the base year,
which has a divisor equal to 1.00.
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 dates-August
15,1987, 2013, and 2016.
 

b. Using the data given in the table and assuming a base index value of 10 on August
15, 1987, calculate the market index, using the same methodology used to calculate
the S&P indexes, at each of the dates,
 

c. Use your findings in parts A and B to describe the general market condition-bull or
bear- that existed between August 15, 2013, and August 15, 2016.
Both the market average and the market index show a general upward trend, indicating a
bull market.
d. Calculate the percentage changes in the average and index values between August
15, 2013, and August 15, 2016. Why do they differ?