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# solution1 - Problem Set 1 Solutions Econ 136 Fall 2008 A...

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Problem Set 1 Solutions Econ 136, Fall 2008 A note about grading: Each of your problem sets will be graded on a 0 to 5 scale. 5= no major or minor errors 4= no more than a few minor errors 3= a major or many minor errors 2= multiple major errors 1= multiple major errors and portions left blank 0= blank or never turned in 1. Internet Exercise: US and Foreign Stock Markets in the Past Five Years (a) To clearly see the di/erence between the linear and log scales, examine the °max±histor- ical range of the chart of the Dow Jones Industrial Average. Even though the linear scale is easier for most people to construct and interpret, when looking at the max historical range of the Dow, the linear scale obscures the ²uctuations of the Dow in the ³rst half of the range. Even though the log scale is harder for most people to construct and interpret, when looking at the max historical range of the Dow, the log scale clearly shows the ²uctuations of the Dow for the entire historical range. Plus, since a log scale shows a variable that grows at a constant rate as a straight line, the growth rate of the Dow is more easily interpreted when using a log scale. In my opinion, the log scale gives a better picture of the past performance of the Dow because it clearly shows the ²uctuations in the value of the Dow for any time period in the full range of available data. (b) The symbols for each index are ^GSPC for the S&P500 and ^IXIC for the Nasdaq. The one-year chart shows that the Nasdaq has performed the best and the Nikkei 225 has performed the worst over the past year. Between Sep 11th, 2007 and September 10th, 2008, the Nasdaq has changed by (2,228.70 - 2,597.47) / 2,597.47 = -14.20% and the Nikkei 225 has changed by (12,346.63 - 15,877.67) / 15,877.67 = -22.24%.

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