Question

Imagine that the​ Mini-Dow Average​ (MDA) is based on the closing prices of 5 stocks. The divisor used in the calculation of the MDA is currently 0.765. The closing prices for each of the 5 stocks in the MDA today and exactly 1 year​ ago, when the divisor was​ 0.780, are given in the following​ 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 bear​ market?

Stock   Today           1 Year Ago
Ace Computers   74.14   65.26
Coburn Motor Company   38.71   34.73
National Soap & Cosmetics   110.17   94.48
Ronto Foods   73.66   71.09
Wings Aircraft   96.07   86.13

Answer 1

a.

Given:

Index divisor (Today) = 0.765

Index divisor (1 year) = 0.780

Ace computers (Today) = $74.14

Coburn motor company (Today) = $38.71

National soap & cosmetics (Today) = $110.17

Ronto foods (Today) = $73.66

Wings aircraft (Today) = $96.07

Ace computers (1 year) = $65.26

Coburn motor company (1 year) = $34.73

National soap & cosmetics (1 year) = $94.48

Ronto foods (1 year) = $71.09

Wings aircraft (1 year) = $86.13

For 1 year:

Index value =

(Ace computers (1 year)+Coburn motor company (1 year) +National soap & cosmetics (1 year) +Ronto foods (1 year) +Wings aircraft (1 year) ) / Index divisor (1 year)

Index value =(65.26+34.73+94.48+71.09+86.13) / 0.78

Index value = 351.69/0.78 = 450.88

For today:

Index value = (Ace computers (Today) + Coburn motor company (Today) + National soap & cosmetics (Today) + Ronto foods (Today) + Wings aircraft (Today)) / Index divisor (Today)

Index value = (74.14+38.71+110.17+73.66+96.07) / 0.765

Index value = 392.75 / 0.765 = 513.398

b.

Value of MDA today is higher = 513.398  - 450.88

Value of MDA today is higher = 62.52

Increase in percenage = (62.52/450.88) * 100

Increase in percenage = 13.86%

so the value of MDA is in an increasing trend. Therefore the market is a bull market.