Why are Dow Jones Industrial Average index and Nikkie Dow Jones stock Average index calculated by price-weighted method but value-weighted and unweighted method? What circumstances will we use price-weighted method? Thanks.
I suspect it’s just because that is how it was done from the start, when the indicies were constructed.
I’m with newsuper. They just are.
Newsuper, the thing i am struggling is that how it was done as you say. Why Dow and Nikkie index were constructed by price-weighted way? I guess outstanding shares of all firms listed on Dow and Nikkie exchange are almost equal so that there are no impact on the index due to number of shares. Its right? Or any reasons else?
No idea, I personally think a price-weighted index is dumb way to calculate an index, but what is an index any? It’s just a reference point and is meaningless in and of itself. Personally I think that value-weighted indicies are a better for calculating an index - at least it considers the company as a whole, instead of on the basis of how high it’s share price is. This seems to be a nice little summary http://gbr.pepperdine.edu/012/dow.html
The reason the Dow was created as a price weighted index was that (at the time), it was easier to calculate an index that way. In the old days, calculating a cap-weighted index without computers was a non-trivial exercise. However, a share weighted one was comparatively easy. Once created, it became set practice.
hi, this is just a general question in regards to ‘Equity’ section. i am having real trouble retaining the material found in this section for some reason, and am doing very poorly on the end of chapter questions. just wondering, how thoroughly must we know all these information? and how important is this section in the CFA exam?