FISD Financial Information Associate (FIA) Module 2 Practice Test

Which of the following describes the Dow Jones Industrial Average weighing scheme compared to the S&P 500?

It includes several hundred stocks It is equal-weighted The index is market cap weighted It is price weighted

Correct Answer:

It is price weighted

Explanation:

Price weighting means a stock’s influence on the index depends on its share price. The Dow Jones Industrial Average uses a price-weighted scheme, so higher-priced stocks move the index more than lower-priced ones, regardless of how large the company is. The S&P 500, by contrast, is weighted by market capitalization, so bigger firms by value have a greater say in its level. The Dow also consists of 30 stocks, not hundreds, and is not equally weighted. So describing the Dow as price weighted best captures how its movements are driven relative to the S&P 500.

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