Question

Contrast the U.S. Dow Jones Industrial Average and the Standard & Poor's Composite Index on the issue of representativeness.

Answer 1

There is a major difference between U.S. Doe Jones Industrial Average and Standaed & Poor's composite index in how they value a stock in their index.

The U.S. Dow Jones Industrial average is weighted by price in it's index. This means, stock price of each stock is added in the index and then each stock is divided by the total number of stocks to determine index value. A company with a higher stock price will have a greater impact in the index.

The S&P is weighted by market capitalization. A stock price is multiplied by the total number of outstanding shares to arrive at total value of the company. A company with a larger market capitalization will represent a larger share than a company with a small market value. Here the volatility of the large cap will be more representative of the market.