Functional Form Homework
You are (hopefully) thinking about your term project. One good source of data is the
Economic Report of the President. http://www.gpoaccess.gov/eop/tables06.html . You
might want to just take a look if you are interested in U.S. time series data.
As you know, there has been some talk about the changes in the return from stocks in
recent decades. Go to B-95 and B-96 to gather the data on an annual basis. You can
copy and paste the data into Minitab.
1. Find out the change in the Dow-Jones Industrial Average1 for each of the time
periods below. Write your answer in the box below and attach your output as
well.
Years
1970-1979
1980-1989
1990-1999
2000-2005
Annual Change in Dow Jones Industrial Average
2. 2. Inflation is the annual rate of change in prices. If we take a price index and
find the annual rate of change we have the inflation rate. Please use the CPI-U
(Consumer Price Index for Urban Consumers) from Table 60 to calculate the
annual inflation rate (rate of growth in prices ) the time periods below. Write
your answer in the box below and attach your output as well.
Years
1970-1979
1980-1989
1990-1999
2000-2005
Inflation Annual Change in Prices
1 Dow Jones Industrial Average is the most widely used indicator of the overall condition of the stock market, a price-weighted average of
30 actively traded blue chip stocks, primarily industrials. The 30 stocks are chosen by the editors of the Wall Street Journal (which is published
by Dow Jones & Company), a practice that dates back to the beginning of the century. The Dow was officially started by Charles Dow in 1896, at
which time it consisted of only 11 stocks. The Dow is computed using a price-weighted indexing system, rather than the more common market
cap-weighted indexing system. Simply put, the editors at WSJ add up the prices of all the stocks and then divide by the number of stocks in the
index. (In actuality, the divisor is much higher today in order to account for stock splits that have occurred in the past.)
3. I would argue that investors are interested in the real (after inflation) rate of
return. What has been the annual change in the Dow Jones Industrial Average for
each team period net of inflation?
Years
Annual Change in Dow Jones
Industrial Average Net of Inflation
1970-1979
1980-1989
1990-1999
2000-2005
4. So what can you say about the real change in the Dow since 2000 compared to
1990-99?
5. Text 9-15e. Also, calculate predicted Y when X = 50, 70 and 90.