Nasdaq, S&P, DJIA in the More Distant Past and Now - Coursework Example

Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: EXECUTIVE SUMMARY The report is based on analysis of the stock indexes. This index includes NASDAQ Composite, S&P 500, and Dow Jones Industrial Average (DJIA). The report utilizes various financial tools in analysis of stock such as standard deviation (volatility), coefficient of variation, quartile and inter-quartile range, mean, minimum and maximum indices. The comparison is majorly on industrial analysis comparing various variables among the industry players and individual analysis basing on historical data of different years. Table of Contents EXECUTIVE SUMMARY ii Table of Contents iii 1.0 INTRODUCTION 1 2.0 Analysis of the indexes 2 2.0.1 Nasdaq Weekly Data (2009) 2 3.0 1999 and 2009 NASDAQ Comparison 5 4.0 S&P AND NASDAQ Comparison (2009 DATA) 6 5.0 Dow Jones Industrial Average and NASDAQ Comparison 8 5.0.1 Time plot 8 6.0. 2001 and 2013 Dow Jones Industrial Average Comparison 11 CONCLUSION 11 REFERENCE 12 Appendices 13 Appendix 1: Weekly sales figures 14 Appendix 2: Measures 16 1.0 INTRODUCTION Potential investors require need to carry out due process before investing on any given portfolio. The most common tool for analysis stock is coefficient of variation on which the variability of the stock indices is determined. It is arrived at by dividing standard deviation with the mean or average. High variation coefficient index signifies highly dispersed stock indices and vice versa. Secondly, standard deviation on which it is used to determine the riskiness of a given portfolio. When standard deviation is high, risk associated to that portfolio is also high. Mean is also used to determine the central value of the index in a given set of indexes. Lastly, inter-quartile range which shows the difference between the highest and lowest index, high range shows possibility of having high returns due in case the index goes up (Shaw, 1955). The players sampled are NASDAQ Composite Index which measures both domestic (U.S.) and international NASDAQ common-type stocks that are listed on the NASDAQ Stock Market with 3000 common equities (Shaw, 1955). Secondly, S&P 500 Index that comprises of 500 leading companies that covers roughly 80% of market capitalization. The index is used by both USA and Non-USA in trading stock though it is commonly used in U.S.A in determination of the growth of stock in technology companies. Lastly, Dow Jones Industrial Average which emphasises on weight of the prices. It is one of the oldest indexes used where 30 large publicly owned companies are used in determination of the indexes. The selected companies are exclusively U.S.A based companies (Shaw, 1955). Investors in financial market are always cautious on their investment since one need to get maximum return on his/her portfolio. It is therefore important to carry out due process before doing any investment. This due process involves in-depth analysis and use of wide range of data in order to reduce errors and increase accuracy of the result. The data analyzed below give perspective on variability, standard deviation, inter-quartile range and mean. 2.0 Analysis of the indexes 2.0.1 Nasdaq Weekly Data (2009) Variation coefficient of the NASDAQ Composite Index denotes the relative dispersion of stock in stock indices from mean. The time plot always explain variability through its upwards (increase), downwards (decrease) or stagnant movements. The time plot below shows variability of the stock traded for weekly data in 2009 for NASDAQ. Fig 1. NASDAQ Composite Index for 2009. Source: Yahoo Finance From time plot above, we are able to note that the NASDAQ Composites Index shows that the market has been responding positively due to steady rise with minute changes. The period that recorded the lowest index was in first week of March where they recorded Index of 1293.85. The highest index from the graph is 21st December where they recorded the highest index of 2285.69. Investors should therefore actively trade on stock since the market is relatively stable (appendix 1). In addition, investors are likely to experience growth in their investment due to the positive trend showed by the time plot from first week of March. It is predicted that it will keep on increasing due to various market development and entry of new players in the market thus increase in demand and reduction of information asymmetry because of increase in investor education through internet and growth in local financial markets. It is therefore noted that the coefficient of variation in 2009 was at 14.65% (). Coefficient of variation is though useful in comparing two sets of data more. Standard deviation Standard deviation is measure that enables investors to gauge the variations of the range of data from its mean (Volatility). The standard deviation for NASDAQ Composite Index in 2009 was 270.848 (appendix 2) which is relatively high therefore risky for the investors to invest in but there is possibly of either gaining high returns or losses. In this case, investors of stock are required to diversify their portfolio in order to reduce magnitude of lose if the prices of a given market fall since it will be offset by boom (bullish) market. Stock market with high standard deviation (risky) is usually associated with high returns only if the investor takes calculated risk. Risk takers investors are the main players in volatile market since they eye for the big returns with no or little regret if the market prices fall. In the other hand, low standard deviation signifies less risky market but low returns since there is little variation between expected and normal returns recorded. Therefore, it is advisable for investors to consider the volatility of the market in developing their investment portfolio in order to maximize returns and minimize the risk. Inter-quartile Range The use of Inter-quartile Range is essential to investor in determining place in which the stock price could fall thus enable one to avoid buying over priced stock or selling under priced stock. The range between the highest and lowest index can be arrived at subtracting the lowest index from highest index (2285.69-1293.85= 991.84). This method is not recommended for making informed decision since it is affected by extreme value thus advisable to use inter-quartile range since it uses 25Th value (Q1) and 75th value (Q3). The method eliminates effects of extreme values from each end since range will be arrived at subtracting Q1 from Q3 (IQR=Q3-Q1). For NASDAQ Composite Index in 2009, inter-quartile range is 458.71 (2090.92-1632.21) (appendix 2). The inter-quartile range is small than the other range of subtracting highest and lowest value but inter-quartile range is more accurate in making the decision. The index range is relatively high but within the required range therefore, investors can invest their funds in a diversified portfolio in order to maximize their returns and minimize risk. The prices should be within the above range in order to avoid buying over priced stock or selling under priced stock which reduces profit margin or even lead one to incur huge losses. Mean Mean is a measure used to show the middle value or where most values could possibly fall in. This tool is important for the investor in making decision with moderation or at average risk and return i.e. one doesn’t wait for the prices to fall below average or above average in order to buy or sale stock. The mean for NASDAQ Composite Index in 2009 was at 1848.725, this index is at the central point between the highest and lowest index values (appendix 2). 3.0 1999 and 2009 NASDAQ Comparison Fig 2. NASDAQ comparison for 1999 and 2009. Source: Yahoo Finance Variability The time plot above shows the comparison of the variability (rise and fall) of the NASDAQ composite index for 2009 and 1999. It is evident that in 1999, the index was relatively high than in 2009 showing that there is increased competition in the market thus forcing the players in stock market to reduce stock price thus lowering the index. In addition, 1999 time plot shows relatively wavier curve than in 2009 thus high variability between normal and expected index, the major cause is the difference in the information available to investors. The relatively smooth curve for 2009 since most of the investors have equal information thus able to make rational decision which reduces movement of the normal return from expected. According to variation of coefficient, stock indices in 1999 (16%) were more dispersed from mean than in 2009 (15%) thus supporting the shape of the curve. Standard deviation The standard deviation for 2009 is 266.9543 while that of 1991 is at 432.7716. It is therefore noted that the stock market was riskier in 1999 than in 2009 this drop is attributed to increase in investor education and growth in stock market. Inter-quartile Range The Inter-quartile Range shows amount to which the highest value deviates from the lowest value. It signifies the variation within which the index is bound. In comparing 2009 and 1999, we are able to note that the inter-quartile range was wider in 2009 (453.78) than in 1999(389.38) this is due to drop in the index to low off 1293.85 compared to that of 1999 which was at 2283.6 Mean In 1999, the central value for the index was at 2750.118 while in 2009, the mean was at 1840.64 showing that indexes where relatively higher in 1991 than in 2009. 4.0 S&P AND NASDAQ Comparison (2009 DATA) The time plot below shows the comparison between S&P and NASDAQ for the year 2009. Fig 3. NASDAQ Vs S&P for 2009. Source: Yahoo Finance Variability From the graph above we are able to note that NASDAQ is more dispersed from mean (15%) than S&P 500 (12%). This means that NASDAQ index is more risky than S&P 500 index. High variability index is attractive to risk takers while low volatility is for moderate or risk averse investors (S&P 500). Standard deviation The standard deviation for NASDAQ is at 266.9543 while in 113.7204 for S&P 500 showing that NASDAQ index is more risky than S&P 500 index thus stock investors should go for S&P 500 Index in order to minimize likely losses that might be incurred. Inter-quartile Range The inter-quartile range for the NASDAQ was at 456.365 while S&P was at 175.135 this shows that NASDAQ had high variations between the lower and higher index than that of S&P after adjusting for the extreme values. 5.0 Dow Jones Industrial Average and NASDAQ Comparison 5.0.1 Time plot Fig 4. NASDAQ Vs DJIA for 2009. Source: Yahoo Finance Variability It is evident that Dow Jones is less variable than Nasdaq index from the graph above. According to coefficient of varation of Dow Jones is at 11% while that of Nasdaq is at 15% this is as a result of the higher mean that is exhibited by Dow Jones(volatility= stdv/mean). This shows that Nasdaq is more dispersed from mean (risky) than Dow Jones. Standard deviation The standard deviation for Dow Jones is higher (999.1054) than that of Nasdaq (266.9543) therefore, Dow Jones shows tendency of high riskiness but due to low volatility, it signifies that the possibility of the risk to occur is relatively low in comparison to Nasdaq index. 5.0.2 Box plot Dow Jones Nasdaq Fig 5. Box plot for NASDAQ Vs DJIA for 2009. Source: Yahoo Finance According to the box plot above, we are able to note Nasdaq index have attractive returns than Dow Jones this is because more indices are on the left side. Also, it has a higher upper whisker and hinge. The plot box also can be used to measure volatility. In the case scenario above, Nasdaq index is more volatile than Dow Jones. This is because Nasdaq is relatively more skewed to the left than that of Dow Jones. In addition, Nasdaq indices are dispersed from median than that of Dow Jones 5.0.3 Histogram Fig 6. Histogram for dow jones in 2009. Source: Yahoo Finance Fig 7. Histogram for NASDAQ in 2009. Source: Yahoo Finance From the histogram above we are able to determine that Nasdaq index is less volatile than Dow Jones due to the fact that Nasdaq has three equal bars while that of Dow Jones varies. In conclusion, we are able to note that Dow Jones is relatively risky than Nasdaq index thus investor should invest prudently on Dow Jones index. 6.0. 2001 and 2013 Dow Jones Industrial Average Comparison Fig 6. DJIA for 2001 and 2013. Source: research.stlouisfed.org Volatility The coefficient of variation for 2001 was at 6.07% while that of 2009 was at 11.26% and 2013 was at 4.896%. According to above analysis we are able to note that stock indices were less dispersed from the mean in 2013 thus easy to predict and make investment decision, followed by 2001 and lastly 2009 which recorded the highest variation coefficient. The standard deviation for 2001 was at 620.093, 999.105 in 2009 and719.92 in 2013. From the standard deviation, we are able to note the index was risky in 2009 followed by 2013 and 2001 as arranged according to the size of standard deviation. It is advisable to use variation coefficient in this case to make investment decision since we are trying to compare volatility for more than two sets of data (2001, 2009 and 2013 data). CONCLUSION Every investor always aims at maximizing returns while minimizing risk. It is therefore, important for an investor to carry in-depth investigation in order to avoid investing in a risky stock. The major cause of huge losses in financial market is the failure of investor to investigate various indexes and use of diverse financial tools such as volatility and standard deviation. In conclusion, investors need to always exercise due process before investing on any given portfolio. In case one does not of have knowledge and skills on stock analysis, it is advisable to visit financial specialist since financial market is trickier than normal commodity market. REFERENCE DJIA INDEX (n.d) available from: http://research.stlouisfed.org/fred2/series/DJIA/downloaddata Shaw Robert B. (1955). ‘The Dow Jones Industrials vs. the Dow Jones Industrial Average’. Financial Analysts Journal I1(5).37-40. Web S&P 500 INDEX (n.d.). Available from: http://www.spindices.com/indices/equity/sp-500. YAHOO FINANCE, NASDAQ COMPOSITE INDEX (n.d.). Available from: http://finance.yahoo.com/q/hp?s=^IXIC&a=00&b=1&c=1998&d=00&e=1&f=2014&g=d. Appendices Appendix 1: Weekly sales figures NASDAQ Composite Index Weeks 1 1/2/2009 1632.21 2 1/5/2009 1571.59 3 1/12/2009 1529.33 4 1/20/2009 1477.29 5 1/26/2009 1476.42 6 2/2/2009 1591.71 7 2/9/2009 1534.36 8 2/17/2009 1441.23 9 2/23/2009 1377.84 10 3/2/2009 1293.85 11 3/9/2009 1431.5 12 3/16/2009 1457.27 13 3/23/2009 1545.2 14 3/30/2009 1621.87 15 4/6/2009 1652.54 16 4/13/2009 1673.07 17 4/20/2009 1694.29 18 4/27/2009 1719.2 19 5/4/2009 1739 20 5/11/2009 1680.14 21 5/18/2009 1692.01 22 5/26/2009 1774.33 23 6/1/2009 1849.42 24 6/8/2009 1858.8 25 6/15/2009 1827.47 26 6/22/2009 1838.22 27 6/29/2009 1796.52 28 7/6/2009 1756.03 29 7/13/2009 1886.61 30 7/20/2009 1965.96 31 7/27/2009 1978.5 32 8/3/2009 2000.25 33 8/10/2009 1985.52 34 8/17/2009 2020.9 35 8/24/2009 2028.77 36 8/31/2009 2018.78 37 9/8/2009 2080.9 38 9/14/2009 2132.86 39 9/21/2009 2090.92 40 9/28/2009 2048.11 41 10/5/2009 2139.28 42 10/12/2009 2156.8 43 10/19/2009 2154.47 44 10/26/2009 2045.11 45 11/2/2009 2112.44 46 11/9/2009 2167.88 47 11/16/2009 2146.04 48 11/23/2009 2138.44 49 11/30/2009 2194.35 50 12/7/2009 2190.31 51 12/14/2009 2211.69 52 12/21/2009 2285.69 53 12/28/2009 2269.15 Appendix 2: Measures Read More