Question

Which one of the following is a true statement regarding the Dow Jones Industrial Average?
1. It is a value-weighted average of 30 large industrial stocks
2. It is a price-weighted average of 30 large industrial stocks
3. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange
4. It is a value-weighted average of all stocks traded on the New York Stock Exchange

Answer 1

Answer:

2) It is a price-weighted average of 30 large industrial stocks

Explanation:

The Dow Jones Industrial Average is a price-weighted index of 30 large industrial firms, although some of them are really not industrial firms, e.g. Microsoft, Visa, Walmart, UnitedHealth, Nike, etc.

It is a price weighted index because the firms that are included in the index are weighted in proportion to their stock price. So when any stocks are split, the stock divisor must be adjusted. This index doesn't consider total market capitalization or total shares outstanding.