Question

The S&P 500 and the Dow Jones Industrial Average indices are proxies for the broader US stock market. You notice one day that the S&P 500 closed UP by 0.20%, while the DJIA closed DOWN by 0.20%.

Explain how it is possible for one proxy (S&P 500) to have a positive return while the other (DJIA) has a negative return on any given day. Include in your explanation some names that could have caused this discrepancy. Which return (S&P 500 or DJIA) is more indicative of the 'true market return'?

To facilitate your analysis, please refer to the link below that shows the components of the S&P 500 and DJIA.  Hint: Recall the S&P 500 contains the largest 500 US companies where the weight of each name is proportional to its market value. The DJIA is a price-weighted index comprised of select 30 names representing certain industries.

Answer 1

Different index have different weight of stocks

Following is the list of stocks with highest weight in S&P 500

Company	Weight
Microsoft	5.75
Amazon	5.36
Apple	4.12
Facebook	2.09

Following is the list of stocks with highest weight in Dow Jones

Apple	8.78
UnitedHealth Group	8.18
Home Depot	6.84
Visa A	5.34

Suppose in a particular day Microsoft rises by 2% and United Health group falls by 2% and all the stocks remain unchanged

then there will be a positive retun in S&P 500 and a negarive close for dow jones

this is the main reason for the discripency

Different index have different stocks with different weights therefore percentage change vary

S&P 500 comprise of 500 stocks from all the sectors, thus it is a well diversified index and is more indicative of true market return