The author replies: Woods is correct in noting that, technically, the Dow Jones Industrial Average should not be described as "capitalization-weighted." Nonetheless, no longer can that popular statistic, which now represents about one third the common shares of all NYSE-listed corporations, be considered simply "price-weighted." Once a formula that involved merely adding up the prices of 30 stocks and dividing by 30, today 30 prices are likewise added, but are factored by a divisor that has been reshaped not only by capitalization changes via stock splits and stock dividends, but also by numerous replacements of one capital entity with another, such as is soon to occur when Philip Morris and General Electric are merged. The number of shares in the Dow influences that calculation, since to budge a Dow stock a significant fraction demands far more trading activity than for similar-priced but less lavishly capitalized brethren.
Dec 1, 1985