Construction of the Dow Jones Industrial Average
Question
How is the Dow Jones Industrial Average calculated?
Short answer
It is price-weighted. The index equals the sum of the share prices of its 30 component stocks divided by the Dow divisor, which is adjusted for splits, spin-offs and membership changes so these events do not move the index. High-priced stocks therefore dominate regardless of company size, which is its main criticism.
Adapted from Crack, Heard on the Street, Q5.3.20, p.51; question and answer rewritten by SelfMadeQuant.com.
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