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Boran Stockbrokers, Inc., selects four stocks for the purpose of developing its own index of stock market behavior. Prices per share for a Year 11 base period, January of Year 3,3, and March of Year 33 follow. Base-year quantities are set on the basis of historical volumes for the four stocks.

 Price per Share ($)  Stock  Industry  Year 1  Base  January  March  Quantity  Year 1  Year 3  Year 3  A  Oil 10031.5022.7522.50 B  Computer 15065.0049.0047.50 C  Steel 7540.0032.0029.50 D  Real estate 5018.006.503.75\begin{array}{clcccc} & & {\text{ Price per Share (\$) }} \\ \text { Stock } & \text { Industry } & \text { Year 1 } & \text { Base } & \text { January } & \text { March } \\ \text { Quantity } & \text { Year 1 } & \text { Year 3 } & \text { Year 3 } \\ \text { A } & \text { Oil } & 100 & 31.50 & 22.75 & 22.50 \\ \text { B } & \text { Computer } & 150 & 65.00 & 49.00 & 47.50 \\ \text { C } & \text { Steel } & 75 & 40.00 & 32.00 & 29.50 \\ \text { D } & \text { Real estate } & 50 & 18.00 & 6.50 & 3.75 \end{array}

Use the Year 11 base period to compute the Boran index for January of Year 33 and March of Year 3.3. Comment on what the index tells you about what is happening in the stock market.

Question

Boran Stockbrokers, Inc., selects four stocks for the purpose of developing its own index of stock market behavior. Prices per share for a 2007 base period, January 2009, and March 2009 follow. Base-year quantities are set on the basis of historical volumes for the four stocks.

    Price per Share ($)  20072007JanuaryMarchStockIndustryQuantityBase20092009AOil10031.5022.7522.50BComputer15065.0049.0047.50CSteel7540.0032.0029.50DReal Estate5018.006.503.75\begin{matrix} \text{ } & \text{ } & \text{ } & \text{ } & \text{Price per Share (\$)}\\ \text{ } & \text{ } & \text{2007} & \text{2007} & \text{January} & \text{March}\\ \text{Stock} & \text{Industry} & \text{Quantity} & \text{Base} & \text{2009} & \text{2009}\\ \hline \text{A} & \text{Oil} & \text{100} & \text{31.50} & \text{22.75} & \text{22.50}\\ \text{B} & \text{Computer} & \text{150} & \text{65.00} & \text{49.00} & \text{47.50}\\ \text{C} & \text{Steel} & \text{75} & \text{40.00} & \text{32.00} & \text{29.50}\\ \text{D} & \text{Real Estate} & \text{50} & \text{18.00} & \text{6.50} & \text{3.75}\\ \end{matrix}

Use the 2007 base period to compute the Boran index for January 2009 and March 2009. Comment on what the index tells you about what is happening in the stock market.

Solution

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Weighted Aggregate Price Index in Period t : It=PitQiPi0Qi(100)\boxed{\text{Weighted Aggregate Price Index in Period $t$ : }\color{#4257b2}{I_t=\dfrac{\sum{P_{it}Q_i}}{\sum{P_{i0}Q_i}}(100)}}

where

PitP_{it} - unit price for item ii in period tt

Pi0P_{i0} - unit price for item ii in the base period

QiQ_i - quantity of usage for item ii

  • {Boran index for January 2009}

It=PitQiPi0Qi(100)=22.75(100)+49.00(150)+32.00(75)+6.50(50)31.50(100)+65.00(150)+40.00(75)+18.00(50)(100)73.5\begin{align*} I_t &=\dfrac{\sum{P_{it}Q_i}}{\sum{P_{i0}Q_i}}(100)\\ &=\dfrac{22.75(100)+49.00(150)+32.00(75)+6.50(50)}{31.50(100)+65.00(150)+40.00(75)+18.00(50)}(100)\\ &\approx\boxed{73.5} \end{align*}

  • {Boran index for March 2009}

It=PitQiPi0Qi(100)=22.50(100)+47.50(150)+29.50(75)+3.75(50)31.50(100)+65.00(150)+40.00(75)+18.00(50)(100)70.1\begin{align*} I_t &=\dfrac{\sum{P_{it}Q_i}}{\sum{P_{i0}Q_i}}(100)\\ &=\dfrac{22.50(100)+47.50(150)+29.50(75)+3.75(50)}{31.50(100)+65.00(150)+40.00(75)+18.00(50)}(100)\\ &\approx\boxed{70.1} \end{align*}

Thus, the stock market price decreases from January to March in 2009.

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