In May 2012, IBM was the highest priced stock in the DJIA and Alcoa was the lowe

ID: 2772856 • Letter: I

Question

In May 2012, IBM was the highest priced stock in the DJIA and Alcoa was the lowest. On May 9, 2012, the DJIA opened at 11,960.09. The divisor at that time was .132550914. The closing price for IBM on May 8, 2012, was $291.48 and the closing price for Alcoa was $16.38. Suppose the next day the other 29 stock prices remained unchanged and IBM increased 3.8 percent. What would the new DJIA level be? Now assume only Alcoa increased by 3.8 percent. Find the new DJIA level. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Explanation / Answer

There are 2 questions here:-

In the United States there are major indicators, or indexes, of market movements: the Nasdaq Composite, Dow Jones Industrial Average (DJIA or "the Dow") and the Standard & Poor's 500. As a collective, these market indexes are referred to as the Security Market Indicator Series (SMIS). They provide a basic signal of how specific markets perform during the day. Of these three, the DJIA is the most widely publicized and discussed. Fortunately for us, it is also the easies

Today, the DJIA is a benchmark that tracks American stocks that are considered to be the leaders of the economy and are on the Nasdaq and NYSE. The DJIA covers 30 large-cap companies, which are subjectively picked by the editors of the Wall Street Journal. Over the years, companies in the index have been changed to ensure the index stays current in its measure of the U.S. economy
DJIA Divisor: To absorb the effects of price changes from splits, those calculating the DJIA developed the Dow divisor, a number adjusted to account for events like splits that is used as the divisor in the calculation of the average.

To calculate the DJIA, the current prices of the 30 stocks that make up the index are added and then divided by the Dow divisor, which is constantly modified. To demonstrate how this use of the divisor works, we will create a mock index. The Mock index is composed of 10 stocks, which total $1,000 when their stock prices are added together. The mock index quoted in the media is therefore 100 ($1,000/10). Note that the divisor in our example is 10.

And How Does the DJIA Number Translate into a Dollar Value?
To figure out how a change in any particular stock affects the index, divide the stock's price change by the current divisor. For example, if General Electric is up $5, divide five by 0.14418073, which equals 34.68. Thus, if the DJIA was up 100 points on the day, GE was responsible for 34.68 points of the move.

Therefore in our given question,

PART-1

Price change in IBM stock= 3.8% of $291.48 = $11.70624

Therefore, effect on DJIA level= (price change/ dow divisor) =$11.70624/ .132550914 = 83.562

Now assuming, other 29 stock prices remained unchanged and IBM increased 3.8 percent.

New DJIA level= 11960.09+83.562 = 12403.6522 (answer)

Similarly, part-2 answer

Price change in Alcoa stock= 3.8% of $16.38= $0.62244

Therefore, effect on DJIA level= (price change/ dow divisor) =$0.62244/ .132550914 = 4.696

Now assuming, other 29 stock prices remained unchanged and Alcoa increased 3.8 percent.

New DJIA level= 11960.09+4.696 = 119464.786 (answer)

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In May 2012, IBM was the highest priced stock in the DJIA and Alcoa was the lowe

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