Question

The Dow Jones Industrial Average Index (DJIA) is the oldest continuously quoted index of stock price performance. The index tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The index is maintained by maintained by S&P Dow Jones Indices and often re-evaluated to replace companies that no longer meet the listing criteria with those that do by a committee.

Critically discuss the use of the DJIA as an asset allocation proxy.

Answer 1

The dow jones industrial average can be termed as the stock index that comprises 30 top blue-chip industrial and financial organizations working and operating in the US region. The index is used as a barometer to assess the performance of the stock market and the performance of the economy simultaneously. The scope of DJIA is limited to S&P 500 and it has the top 30 stocks out of thousand stocks. The DJIA is the price-weighted index and it does not look into the changes of market capitalization as compared with the indices that are well known in nature that do the accounting for market capitalization. Therefore, for the asset allocation proxy of the top 30 stocks, the DJIA is computed and determined by utilizing price weights as divisors to the available index components. The other indexes utilize market capitalization to make asset allocation of stocks selected out of the thousand stocks available.