Hello everyone, Lu's back! It's been a while. After a refreshing week indulging in sleep and food, I'm ready to return to work. Hopefully, for those of you who had them, your spring break was enjoyable, too.
To refresh all our minds, allow me to briefly summarize what I've blogged about in the last few weeks. After acquainting myself thoroughly with the Matlab software by using it to solve problems such as how to create magic matrices, I've acquired historical data for several stock indices, and again using Matlab, have determined that based on the last year, these indices' prices all varied with a period of about 128 days.
Now, while many people use these indices to help them make investment decisions and track the condition of the stock market, the ways in which such indices are derived are not necessarily common knowledge.
Let's take a look at how one such index, the Dow Jones Industrial Average, is calculated.
The Dow Jones Industrial Average is calculated from the prices of 30 of the largest and most held public companies in the United States. When the index was first created, the stock prices were simply added up and divided by the number of stocks included in the index. Today, the method is a little more complicated.
Today, the DJIA incorporates what's known as the Dow divisor, a constantly changing number that accounts for events like stock splits. To calculate the DJIA, one simply adds up the prices of the 30 companies and divides by the Dow divisor, thus getting a number reflective of how large corporations are performing in the stock market. Furthermore, to find how much changes in a specific stock affects the index, one can divide the change in stock value by the Dow divisor, yielding the percent change in the index that stock is responsible for.
Pretty cool, no?
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