Problems with the Dow Jones Industrial Average-A Simple Unweighted Arithmetic Mean: An Issue Re-Revisited

Richard D. Gritta and Brian Adams

The Dow Jones Industrial Average is perhaps the world’s most widely watched stock market index. This paper examines its calculation and highlights key problems limiting its usefulness as a broad market gauge. Stock market indices are important as they are considered to be leading indicators of economic growth and are standards against which investors can measure their performance. It is important, therefore, to examine their strengths/weakness. The Dow is computed as an unweighted arithmetic mean. The paper will also discuss several other important indices, such as the Standard and Poor’s Industrial Average, the S&P average and others, that are in the form of weighted means or index numbers and one that is a geometric mean. This article will also brief explore these and how they handle the problems associated with the Dow and suggest a new calculation for the Dow.

DOI : https://doi.org/10.21102/graf.2016.09.72.06