Answers: Chapter 8 - Understanding the Market


8.1: What are the three most prominent stock indexes in the United States today?

The Dow Jones Industrial Average (the Dow or the DJIA), the Standard & Poor’s 500 (the S&P 500), and the NASDAQ Composite Index (the NASDAQ Composite) are the three most prominent stock indices in the U.S.

 

8.2: When was the Dow Jones Industrial Average (Dow Jones) established and what types of companies were the originally listed on the Dow?

The Dow was established in 1896 and originally included mostly gas and coal companies.

 

8.3: A value of a stock index can tell you one of the following:

  1. How a the value of a particular stock in the index has changed over time
  2. How the general value of a group of stocks has changed over time
  3. Which specific stock to invest in
  4. Which stocks pay dividends

The correct answer is #2
Answers #1, #3 and #4 are far too specific; an index consists of stocks offered by many companies (500 on the S&P 500, for example) and therefore the index can only tell you about how a general group of stocks has changed over time.

 

8.4: There are other prominent stock indexes outside of the Unites States. Identify the countries or regions associated with each of the indexes listed below:

  • The Dax
  • The FTSE 100
  • The Nikkei 225
  • The Hang Seng

Listed in order: Germany (Dax), U.K. (FTSE 100), Japan (Nikkei 225), Hong Kong (Hang Seng)

 

8.5: Which of the 3 most prominent stock indexes in the United States is most closely related to technology stocks?

Of the three major indices, the NASDAQ contains the most companies from the technology sector.

 

8.6: What was the percentage change in the value of the Dow Jones from Dec. 31, 2007 to Dec. 31, 2008? What was the cause of this change?

 

The percentage change is a drop of 33.8% calculated as follows:

(8,776.39 - 13,264.82) * 100/13,264.82 = -33.8%

The drop was caused by the Great Recession -- the biggest financial crisis in over 70 years that began in 2008.

 

8.7:  What was the percentage change in the value of the Dow Jones between Dec. 31, 2015 and Dec. 31, 2016?

 

The percentage change is an increase of 13.2%:

(19,726.6  - 17,425.03) * 100/17,425.03 = 13.2%