Index Comparison

Subject: Development Economics

Paper Model: APA

Paper Type: Capstone Project

Total Words: 1220

Document Outline

Executive Summary
Analysis of the case
Recommendation and Conclusion
 


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Executive Summary

It is analyzed in this report that the precedent index is based representation that is without weights and thus this representation is denominator based in nature and however newly index formed is based on weights and the weights is represented by share capital issued in the market on the basis of its market price. This is the share of the market and the trend by the official trend makers. This is however visible that the new index is more representative to the market and thus is less stable the opposite can be said for the index that is old.

Analysis of the case

Midland Inquirer Oil Index like Dow Jones Industrial Average is a measure of top 7 Oil stocks that rule the oil industry of USA. It is measured by totaling the amount of prices of the shares on a base date and then dividing it with a divisor that is different for each year. This divisor is devised in a manner that it keeps the overall Midland Inquirer indicator constant. The Major arguments against this measure are that it does not take weights into account. The procedure is to simply sum up all the market prices.

The major flaw in un-weighted is that every firm is taken equal. This flaw makes a high performance company that is also a market leader in oil to have similar weight as the lowest of the seven companies that appears in this list. The combination is the measure of accuracy and weights are the depiction of depiction of the true picture. These weights can be based on other factors such as size, growth, earnings, dividends, capital structure or the combination of all these and some other measures.

The arguments that go in favor of this measures are weak in itself as the measure is based on an agreed divisor which represents the industry makes this indicator consistent and continues to fall consistently. This measure is depicting a stable trend and as it combines from the most stable stocks in the industry, it highlights the stability in the market. The most volatile stocks in the market depict an enormous movement at its slightest curve.

It can be concluded that however, it is a measure of votality and signifies the importance of fluctuation of the whole market; this does not depict the true picture as the matter of weights does not bother it. The strong suit of this indicator is that it is a measure with a uniform denominator it tends to highlight huge shifts in the market with small curves and it is a stable measure due to the fact that it does not have weights attached to it. So if a stock with a large weight attached to it falls quickly or becomes insolvent does not affect this measure much as this is the measure without weights.

The Index devisor had the beginning value of 7 and on December 31, 1987 the indicator became 1.4238. The function of the divisor is to equalize or at least stabilize Midland Inquirer Oil Index. This function demanded a lesser divisor as the prices of shares fell and as the prices fell it required the least amount of divisor to equalize it. The share prices fell in that era due to the Black Monday. Here Dow Jones Industrial Average fell by 508 points. Furthermore the whole market not just oil crash severely. This was primarily due to the falling of oil prices which preceded the crash and was the primary reason for fall in the divisor in order to balance the equation as a matter of fact.

This Collapse in oil prices was due to the discovery of new oil reserves and tremendous increase in supply in the countries in Middle East. This processor was the cause of greatest fall in Dow Jones and subsequently this oil index as it is a subset of Dow Jones and has the same methodology and effects as its parent.

Therefore it can be concluded that the drastically reduced in this index is due to the catastrophic event of fall in oil prices and a subsequent event of fall in stock market.

Henry’s New Index is based on S&P 500 this index. The change that Harry has put into his indicator is that it measures 20 companies instead of 7 that gives the indicator more representation.  The representation is the key measure that Harry takes into account and denotes that the fluctuation is sufficient and elaborative with the number of companies now being observed.

The second update to the index is adding capital issued in the stock market a sign of weight to the prices. In short he has decided to observe the market value of capital issued and through that and comparison with the average market value of the 20 companies that are being observed. This made a difference and the difference can be studied in terms of two indicators the advantages of this new measure and the disadvantages of this measure.

The advantages of this measure is that it measures 20 companies instead of 7 that almost observes threefold more market that its predecessor and the second is the addition of weights in terms of Capital issued in the market. This enables Henry to observe the true picture a picture with a momentum to depict the intensity and the direction of the market.

The disadvantages of the measure are that it tends to fluctuate more if a company with large capital becomes volatile. If a company has greatest stock issued becomes stable and the rest of the market moves in the other direction then it can be said that the index would remain stable and would show little signs of fluctuations. Another disadvantage is that the company’s issued capital is a weak measure there are more strong measures available that can be used furthermore the weights can be a mixture of several measures combined.

If it is observed and quantified what both indexes depict and what is the difference in points between the two indices, it can be observed that Midland Inquirer Oil index is 202.45. This shows the desperation of the index and the value in points of the Index. Thisvalue also depicts that an index that is not weighted tends to be the result of the sum of all the share prices divided by the divisor specified as 1.42 for December 31, 1986.

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