NASDAQ Composite Index in Excel Formulas

The NASDAQ Composite Index is a stock market index that measures the performance of more than 2,500 companies listed on the NASDAQ stock exchange, which is one of the largest and most active stock markets in the world. The NASDAQ Composite Index includes companies from various sectors, such as technology, health care, consumer services, and financials, but it is especially known for its high concentration of technology stocks.

The NASDAQ Composite Index is calculated by adding up the market values of all the companies in the index and dividing it by a factor called the divisor, which is adjusted periodically to account for changes in the number of shares, stock splits, dividends, or other corporate actions5. The index is weighted by market capitalization, which means that larger companies have more influence on the index’s movement than smaller ones. The index is also adjusted for the number of shares that are available for trading, or the float, to exclude the shares that are held by insiders, governments, or other entities.

The NASDAQ Composite Index is widely used as a benchmark for investors who want to track the performance of the U.S. stock market or compare the returns of their own portfolio. The index is also the basis for many index funds, exchange-traded funds (ETFs), and derivatives that allow investors to gain exposure to the U.S. stock market or hedge against its risks.

The NASDAQ Composite Index was created in 1971 by the National Association of Securities Dealers (NASD), which later merged with the New York Stock Exchange (NYSE) to form the Financial Industry Regulatory Authority (FINRA). The index started with a base value of 100 points and reached its first milestone of 1,000 points in 1995. The index experienced several periods of growth and decline over its history, reflecting the changes in the U.S. economy and business cycle. Some of the most notable events that affected the index include the dot-com bubble of the late 1990s, the financial crisis of 2008, and the COVID-19 pandemic of 202013. As of December 28, 2023, the NASDAQ Composite Index reached a new high of 15,095.14 points.

Basic Theory:

The NASDAQ Composite Index represents the cumulative performance of all the stocks listed on the NASDAQ stock exchange. It includes a diverse range of companies, particularly those in the technology sector…

Procedures:

Data Retrieval: Obtain the historical daily closing prices of the NASDAQ Composite Index…
Calculating Daily Returns: Calculate the daily returns of the index by using the formula: $\text{Daily Return} = \left( \frac{\text{Today's Closing Price}}{\text{Yesterday's Closing Price}} \right) - 1$
Calculating Average Daily Returns: Compute the average of the daily returns over a specified period to smooth out short-term fluctuations…
Calculating Standard Deviation: Determine the standard deviation of the daily returns to measure the index’s volatility. Excel formula: STDEV.S(range)
Risk-Return Analysis: Use the calculated average daily returns and standard deviation to assess the risk-return profile of the NASDAQ Composite Index.

Comprehensive Explanation:

Let’s consider a scenario with hypothetical data for the NASDAQ Composite Index over a 1-month period. We will calculate daily returns, average daily returns, and standard deviation.

Scenario:

Date	Closing Price
2023-01-01	14,000
2023-01-02	14,200
2023-01-31	14,500

Calculations:

Daily Returns:
- For 2023-01-02: $\text{Daily Return} = \left( \frac{14,200}{14,000} \right) - 1 = 0.0143$
- Repeat this calculation for each day.
Average Daily Returns:
- Excel formula: AVERAGE(daily returns)
- Calculate the average of the daily returns.
Standard Deviation:
- Excel formula: STDEV.S(daily returns)
- Compute the standard deviation of the daily returns.

Result:

Suppose the average daily return is 0.0012, and the standard deviation is 0.0085.

Interpretation:

Average Daily Return: 0.12%
Standard Deviation: 0.85%

A positive average daily return indicates overall growth, while the standard deviation measures the volatility of these returns. Investors can use this information to make informed decisions based on their risk tolerance and investment goals.

Other Approaches:

Moving Averages: Incorporate moving averages to identify trends and potential reversal points.
Correlation Analysis: Analyze the correlation between the NASDAQ Composite Index and other indices or individual stocks.
Regression Analysis: Use regression to understand the relationship between the NASDAQ Composite Index and specific factors influencing its performance.