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Dow Drops 200 Points Because Price Weighting Is Silly
DJIA does not depend on number of shares outstanding (as claimed in the article). In fact, that's one of the criticisms of this average - that it is not cap weighted.
Price weighting is not "completely arbitrary". The index was designed for a very specific purpose - simplicity (as I'm sure everyone here knows).
What is described as a "whopping" weight for IBM (6.4%) is less than double the average weight of a stock in this 30 stock index (3.33%). Overweighted, sure. But not beyond all reason. The index still serves its purpose in giving a general sense of the market.
A better criticism (IMHO) and one omitted in this piece, is what S&P might call "lack of representation". Can 30 stocks represent the entire market? To put it another way, is the average 3.33% weighting itself a "whopping" figure?
Comments
DJIA does not depend on number of shares outstanding (as claimed in the article). In fact, that's one of the criticisms of this average - that it is not cap weighted.
Price weighting is not "completely arbitrary". The index was designed for a very specific purpose - simplicity (as I'm sure everyone here knows).
What is described as a "whopping" weight for IBM (6.4%) is less than double the average weight of a stock in this 30 stock index (3.33%). Overweighted, sure. But not beyond all reason. The index still serves its purpose in giving a general sense of the market.
A better criticism (IMHO) and one omitted in this piece, is what S&P might call "lack of representation". Can 30 stocks represent the entire market? To put it another way, is the average 3.33% weighting itself a "whopping" figure?