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Chapter 4: Q. 119 (page 284)

Initial public offerings (1.3): The business magazine Forbes reports that 4567 companies sold their first stock to the public between 1990and 2000. The mean change in the stock price of these companies since the first stock was issued was +111%. The median change was -31%. Explain how this difference could happen .

Short Answer

Expert verified

The mean will be strongly influenced by a few unusually high stock price changes, while the median will remain unaffected by few unusual stock price changes causing mean to be much higher than the median itself .

Step by step solution

01

- Given Information

The mean and median change in stock prices are +111%and-31%respectively . We are required to explain this .

02

-  Explanation

When the mean tends to be greater than the median, then this concludes that there are a few very unusually high deflections in the stock prices (values above +111%) , while most of the changes in the stock prices are negative. Thus in other words, the distribution of the change in stock prices would be highly skewed to the right. The mean will then be strongly influenced by the few unusually high stock price deflections, while the median is mostly unaffected by these few unusually high stock price changes and this then causes the mean to be much higher than the median.

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