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Dow Jones Industrial Average Analysis


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									Dow Jones Industrial Average
    Bryce Anger and Sean Roberts
    L. B. Pearson H. School, Halton
          Teacher: Jane Uloth
    We will be discussing the very essence and
      foundation of Dow Jones Industrial Average
      and the Stock Market.
                          But rather this one…

Not this type of stock…
        Introduction: Road Map

 Background of Stocks and the DJIA
  – Wall Street Video Clip
 Problem and Hypothesis
 One Variable Analysis
 Two Variable Analysis
 Dow Theory
 Theoretical vs. Empirical Trends
 Conclusion
         Business Ownership

 Sole Proprietorship
 Partnership
 Corporation
    –   Private Corporations
    –   Public Corporations (Traded on Stock Market)
    –   Crown Corporations
    –   Non-Profit Corporations
    Cooperative
       Public Corporations

 A business owned by shareholders in the
 Usually very large and expensive to operate.
 Huge amounts of capitol generated from
 The shareholders own shares of the
  corporation that are worth money.
New York Stock Exchange
       Stock Market

 Shareholders may wish to buy or sell their
  shares to other people.
 These sales are conducted at a Stock
  Exchange during specific trading hours and
  by stock brokers on the trading floor.
 The NASDAQ and NYSE are American
  Stock Exchanges that the DJIA draws
  components from.
The NYSE Trading Floor
Wall Street (1985)

      This clip shows the trading
       floor at the opening of a
       trading day.
      This takes place 1985.
      Now, a great deal more
       work is done electronically.
        The Dow Jones Industrial
 The DJIA is an index of 30 "blue-chip" U.S.
 It was created in 1896, by Charles Henry
  Dow (1851-1902)

 Many financial professionals quote it as an
  indicator as to the state of the market.
       The Dow Jones Industrial
 The Dow Jones Industrial Average was
  started with 12 stocks in May 1896, it grew
  to 20 in 1916, then 30 in 1928.
 It is a market average designed to indicate
  how companies traded on the stock market
  are doing in general.

 There are currently 30 stocks that are the
  components of the DJIA.
 The index serves as a measure of the entire
  U.S. market, covering such diverse
  industries as financial services, technology,
  retail, entertainment and consumer goods.
 These companies are selected by the editors
  at the Wall Street Journal and changes are

     30 Component Companies

3M Co.                         Eastman Kodak Co.            J.P. Morgan Chase & Co.
Alcoa Inc.                     Exxon Mobil Corp.            Johnson & Johnson
Altria Group Inc.              General Electric Co.         McDonald's Corp.
American Express Co.           General Motors Corp.         Merck & Co. Inc.
AT&T Corp.                     Hewlett-Packard Co.          Microsoft Corp.
Boeing Co.                     Home Depot Inc.              Procter & Gamble Co.
Caterpillar Inc.               Honeywell International Inc. SBC Communications Inc.
Citigroup Inc.                 Intel Corp.                  United Technologies Corp.
Coca-Cola Co.                                               Wal-Mart
                               International Business Machines Corp. Stores Inc.
E.I. DuPont de Nemours & Co.   International Paper Co.      Walt Disney Co.
        Calculation of the DJIA

 The Dow Jones averages are computed by
  summing the prices of the stocks in the
  average and then dividing by a constant
  called the "divisor".

 The divisor was originally 30, but today it is
  about 0.8.
 The divisor ensures historical continuity.

 Is it possible to project future activity of
  the Dow Jones Industrial Average?

 Provide a general analysis of the direction
  of the stock market and the value of the
  DJIA in the future.

 Using models developed from historical
 data, it will be possible to project the basic
 activity of the DJIA.
 This model should likely be accurate to
  extrapolate general activity for at least the
  next 5 years.
        The Data

 Obtained data on the average point value of
  the DJIA for each year since its creation.
 Point values are adjusted for inflation to
  2002 US dollars.
 The entire history is comparable because of
  this inflation adjustment and the divisor.
       3 Sample Breakdowns

 1896 to 2001 – the entire sample, provides
  an overall trend
 1980 to 2001 –rapid growth seen after 1980,
  chosen to most effectively model the last
  two decades
 1997 to 2001 – a very recent period that
  displays a slowing in the rapid growth seen
  between 1980 and 1997
       One Variable Analysis

 The purpose of the one-variable analysis is
  simply to determine which of the three
  sample breakdowns of the data will be most
  effective in providing the most useful data
  for a predictive two-variable analysis.
 This section will mathematically determine
  the best section(s) of data to use in the two-
  variable analysis.
1896 - 2001
1980 - 2001
1997 - 2001
Measures of Central Tendency

           1896-2001 1980-2001 1997-2001

   Mean      1122.31   4203.654   10214.95

  Median      233.60   2867.415   10299.24

   Mode         N/A        N/A        N/A
1896 – 2001: Box & Whisker
1980 – 2001: Box & Whisker
1997 – 2001: Box & Whisker
Population STD and Z-Scores

                         1896-    1980-   1997-
                          2001     2001    2001

   % Within 1 Standard
             Deviation   91.5%    77.3%   80.0%

    Min Datum Z-Score    -0.480   -2.92   -1.79

   Max Datum Z-Score      4.38     1.95    1.13
      One Variable Conclusion

 The second two sample breakdowns, 1980-
 2001 and 1997-2001, have been identified
 as most accurate for a two-variable analysis.
       Two Variable Analysis

 The aim of this two variable analysis is to
 develop a model to forecast the short-term
 future activity of the Dow Jones Industrial
 Time, in one year intervals, will be the
  independent variable.
 The point value of the DJIA, in 2002 US
  dollars, will be the independent variable.
1896 – 2001: Linear
1896 – 2001: Power
1896 – 2001: Exponential
1980 – 2001: Linear
1980 – 2001: Exponential
1997 – 2001: Exponential
       1980 – 2001: Exponential
 Using this model, it is possible to project
  the point value of the DJIA. For example
  the year 2010 (represented by x = 30 as
  2010-1980=30) can be projected as follows:
  – y = 659.64e^0.1309(30)
  – y = 33479.68887

 Value of the DJIA in 2010 is projected to be
1980 – 2015: Exponential
Model Projection
       Dow Theory

 Dow Theory holds that the Dow Jones
 Transportation Average must "confirm" the
 Dow Jones Industrial Average’s movement
 for a market trend to have staying power.

 If one average produces and one average
  consumes, they should both gain in a
  healthy market.
DJTA & DJIA with Mean
Recent DJIA Activity
      Recent DJIA Activity

 September 11, along with recent economic
 controls in US, have caused a drop in the
 point value and a slowing of the DJIA
 growth recently.
 This trend disproves our Exponential
  Regression model as there is not enough
  data available to model new trends.

 It is impossible to mathematically predict
  the future of the stock market.
 It is concluded that a satisfactory model of
  predicting the DJIA cannot be predicted
  and the hypothesis has been disproved
  because of recent activity.
Dow Jones Industrial Average
Dow Jones Industrial Average
   Bryce Anger and Sean Roberts

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