I constantly read in the news the Dow is moving up or down. Can somoene please explain to me what it means when i read: the Dow is moving up 300 points? What the meaning of those 300 points? how is it determined. Thank you
post has to be a joke.
I’ll ask the nice man who gives me margin calls when this happens.
There’s a section in the Securities Markets section of L1 that shows exactly how the Dow is calculated.
best. question. ever.
May-be it isn’t a joke. If the Dow Jones Industrial Average “The Dow” is at 10,500 points at the start of trading on Monday and it closes at 10,800 by the end of trading Monday, one would say “The Dow was up 300 points on the day”. What those 300 points mean is a little bit tricky because The Down is afterall an average. An average means that a 4% move upward in a high priced stock has MORE affect on the index than a 4% move upward on a lower priced stock. Currently, IBM is the highest price component of the Dow at, say, $118 [making a 4% gain equal to the stock having moved up by $4.72 while Pfizer is the lowest priced component at about $20 making a 4% move upward equal to the stock having gained $0.80]. This is in striking contrast to the S&P/TSX Composite, which is Canada’s flagship stock market. The S&P/TSX is Cap weight…so in Toronto it’s actually the largest companies that move the index the most. If we were to apply the TSX Methodology to the Dow, then you would actually see Mobil Exxon making the biggest impact as Mobil Exxon is - by a MILE - the biggest Cap company in the Dow. IBM is actually 9th. True, at $160 Billion, IBM is no small company, but it’s dwarfed by Mobil Exxon, which is yours to burn to the group for the lofy price of around $400 Billion. Does this help? Willy
that was a very convoluted description of the difference between a price weighted index and a market cap weighted index. OP, next time try google, or you know, Level I
The person that asked that question should be banned from this forum.
You first Mik82, because you obviously do not understand what’s the meaning of a forum in first place.
Giristide Wrote: ------------------------------------------------------- > You first Mik82, because you obviously do not > understand what’s the meaning of a forum in first > place. Click on message board rules: Message Board Rules: AnalystForum is an open forum for communication relating to the CFA exam.
Giristide dont listen to these fools When it says Dow moved up 300 points it means America made $300 for every Dow share there is outstanding.
Giristide asked a question that sounds silly, but actually is worth discussing. “What does it mean when the dow goes up 300 points.” Sounds dumb. It sounds like someone doesn’t know how to calculate a price weighted index. But guess what, why should one use a price weighted index? What’s this divisor thing and how does it get adjusted. But “What is the significance of the dow going up 300 points?” is actually a pretty good question. The Dow was created when the US was becoming a major industrial power and the performance of the industrial sector was a pretty good gauge of the economy. So tracking it was useful. [BTW, the Gross National Product was initially measured by the government to understand the military capacity of an economy to support its armed forces, and was later expanded for economic and social analysis]. The US economy is so diverse, with so many companies in so many sectors, why should a price weighted index of 30 industrial companies be the first index to be reported on the news every night. And is 300 points a lot or a little? And was it one single company that did it or not. And the US is largely de-industrializing now. So I guess we report the Dow first out of Tradition, but I prefer to use S&P 500 as my index of choice. It’s market-cap-weighted, covers at least 500 companies in various sectors. The Russel 3000 is even better, but rarely reported on the news (except maybe in the ticker line).
bchadwick, is your sector allocation strategy more or less in line with that of the S&P?
I haven’t fully developed my sector allocation strategy - it’s more of a global macro approach that thinks at the sector level more than the company level - but I do compare my returns vs. the S&P. I also try to do some conceptual alpha-beta separation by using ETF longs and shorts to control my overall beta exposure. After doing L3, I’m thinking that I should really benchmark vs MSCI Gobal indices or a blend of Emerging and Developed markets. Another alternative is Russel 3000, which is cap-weighted and represents a very large swath of public equities (six times the S&P). I use S&P mostly because it’s a broad index that is reported widely, and I figured that if I were just a passive investor, I’d probably just put my money in an S&P index fund. However, after going through the CFA curriculum, I really do need to rethink my passive asset allocation benchmark to make it consistent with my worldview and approach to investing.
After I asked that, I realize it’s a pretty personal question. I didn’t mean to pry into your strategy. I’ve always been told to choose a benchmark that’s most similar to your holdings, which makes sense, but do you select the benchmark first and then try to outperform it, or do you build your portfolio first and then decide on an appropriate benchmark?
I don’t actually feel MY answer was convoluted. It was a mid level answer: someone who knows a few things about investments but doesn’t know the specifics about the Dow? Willy
No problem about the strategy question. Actually, I was impressed that someone remembered that that’s how I try to do investments. It’s not so much an ideological commitment to an investment style; it’s more an understanding that that is probably where my analytical comparative advantage lies, so I might as well work with it. As for benchmarks, didn’t really understand this until I did L3. (not sure I 100% understand it now, but I surely understand it a lot better). Which benchmark you choose depends on whose money you are managing and what their objectives are. If you are a fund taking institutional money, then you choose a benchmark that tries to match what that institution’s strategic allocation is. So maybe institution has a strategic allocation that is 20% S&P 500 (large cap), 30% Russel 2000 (small cap), 15% MSCI EM (emerging markets), 35% some diversified bond index (you can see how much I know about FI, no?). Then the institution hires you to manage a portion of its allocation to small caps. That means you benchmark to their small-cap index - which is Russel 2000. When starting up, you might just match their holdings and then start to overweight and underweight stuff, which means that your holdings end up closely matching your benchmark (especially if they don’t want you to take on too much extra risk). If you’re managing your own money, the appropriate question is: if I just put stuff in a passively managed vehicle, either a single index fund, or some strategic allocation of index funds (or ETFs) that gets rebalanced periodically, what would that allocation be? Then that should be your benchmark. Any active decisions are deviations from that passive decision. In fact, with both institutions and individual money, the key question is “how would you invest it if it were purely passive.” (though passive can include rebalancing decisions). That’s your benchmark. A lot of institutions try to have tight controls on their risk exposures, and so managers of that money tend to have holdings that are very close to whatever benchmarks the institutions use. So that’s why people say your benchmark should be similar to your holdings. If you come up with a strategy and then you want to sell it to institutions or to HNW people, then you want to look for a benchmark that is closest to your holdings, because that’s how you will sell your strategy: you’ll say “My strategy is like the XYZ benchmark, but performs X% better on an annualized basis, and takes on only Y% tracking error (the SD of the annual over/under performance) to do that.” Wow, long post, but I like talking about this stuff, you see.