Question

The DJIA is a price weighted stock index consisting of 30 blue chip companies. The companies in the DJIA include AAPL, WMT, and MMM, etc. They generally have di§erent stock prices. In the month of September, the DJIA index has dropped by 5%. Assume that at the be- ginning of September, you formed a portfolio by investing $10,000 in EACH of the component companies included in the DJIA. Can you conclude that by the end of September, your portfolioís value has also dropped by 5%? Assume that there is no change in the DJIA components and also ignore any dividends.

Answer 1

DJIA is a price-weighted stock index that consists of 30 blue-chip companies. As the weightage of each of these 30 companies can be different in the index, the fall or increase in the value of this index does not mean that all 30 stocks get increase or decrease in the same ratio.

There may be chances that it may consist of stock that forms the majority of it and that stock fall by a high amount while others do not have any significant change. Even then the index value may decrease.

In this case, the index value has dropped by 5%. This doesn't mean that the portfolio that consists of an equal amount of these stocks will also drop by 5% due to the above-mentioned reasons.