The three most popular stock market indicators in the second group are the Dow Jones Industrial Average, the Standard & Poor’s 500, and the Value Line Composite Average. The DJIA is constructed from 30 of the largest blue chip industrial companies traded on the NYSE. The companies included in the average are those selected by Dow Jones & Company, publisher of the Wall Street Journal. The S&P 500 represents stocks chosen from the two major national stock exchanges and the over-the-counter market. The stocks in the index at any given time are determined by a committee of Standard & Poor’s Corporation, which may occasionally add or delete individual stocks or the stocks of entire industry groups. The aim of the committee is to capture present overall stock market conditions as reflected in a very broad range of economic indicators. The VLCA, produced by Value Line Inc., covers a broad range of widely held and actively traded NYSE, AMEX, and OTC issues selected by Value Line.
In the third group we have the Wilshire indexes produced by Wilshire Associates (Santa Monica, California) and Russell indexes produced by the Frank Russell Company (Tacoma, Washington), a consult- ant to pension funds and other institutional investors. The criterion for inclusion in each of these indexes is solely a firm’s market capitalization. The most comprehensive index is the Wilshire 5000, which actually includes more than 6,700 stocks now, up from 5,000 at its inception. The Wilshire 4500 includes all stocks in the Wilshire 5000 except for those in the S&P 500. Thus, the shares in the Wilshire 4500 have smaller capitalization than those in the Wilshire 5000. The Russell 3000 encompasses the 3,000 largest companies in terms of their market capitalization. The Russell 1000 is limited to the largest 1,000 of those, and the Russell 2000 has the remaining smaller firms.
Two methods of averaging may be used. The first and most common is the arithmetic average. An arithmetic mean is just a simple average of the stocks, calculated by summing them (after weighting, if appropriate) and dividing by the sum of the weights. The second method is the geo- metric mean, which involves multiplication of the components, after which the product is raised to the power of 1 divided by the number of components.
Posts Tagged ‘cash’
Stock Market Indicators, part 2
November 17th, 2010The test of a theory is its ability to predict
July 9th, 2009Economic thinking is scientific. The proof of the pudding is in the eating. How useful an economic theory is depends on how well it predicts the future consequences of economic action. Economists world. Good theories are con- develop economic theories using scientific thinking based on basic principles. The idea is consistent with and help explain real-world events. Theories that are inconsistent with the to predict how incentives will affect decision makers and compare the predictions against real-world events. If the events in the real world are consistent with a theory, we say that real world are invalid and must be rejected. the theory has predictive value and is therefore valid. If it is impossible to test the theoretical relationships of a discipline, the discipline does not qualify as a science. Because economics deals with human beings who can think and respond in a variety of ways, can economic theories really be tested? The answer to this question is yes, if, on average, human beings respond in predictable and consistent ways to changes in economic conditions. The economist believes that this is the case, even though not all individuals will respond in the specified manner. Economists usually do not try to predict the behavior of a specific individual; instead, they focus on the general behavior of a large number of individuals.
In the 1950s, economists began to do laboratory experiments to test economic theories. Individuals were brought into laboratories to see how they would act in buying and selling situations, under differing rules. For example, cash rewards were given to individuals who, when an auction was conducted, were able to sell at high prices and buy at low prices, thus approximating real-world market incentives. These experiments have verified many of the important propositions of economic theory.
Laboratory experiments, however, cannot duplicate all real economic interactions. How can we test economic theory when controlled experiments are not feasible? This is a problem, but economics is no different from astronomy in this respect. Astronomers can use theories tested in physics laboratories, but they must also deal with the world as it is. They cannot change the course of the stars or planets to see what impact the change would have on the gravitational pull of Earth. Similarly, economists cannot arbitrarily change the prices of cars or unskilled-labor services in real markets just to observe the effects on quantities purchased or levels of employment. However, economic conditions (for example, prices, production costs, technology, and transportation costs), like the location of the planets, do change from time to time. As actual conditions change, an economic theory can be tested by comparing its predictions with real-world outcomes. Just as the universe is the main laboratory of the astronomer, the real-world economy is the primary laboratory of the economist.