DJIA1 Beneath the Calm Waters: A Study of the Dow Index Group 5 members Project Choice: Hyo Joon You Data Retrieval: Stephen Meronk Statistical Analysis: Christopher Ross Powerpoint Presentation: Anthony Mak Executive Summary: Joseph Singh Technical Appendix: Alejandro Vicente

DJIA2 Brief info about the Dow A measure of entire U.S. market, covering all major industries Maintained and reviewed by the editors of WSJ. Stocks selected for reputation, growth, popularity, representation of its industry Dow Jones Index currently consisting of 30 components (individual companies)

DJIA3 DJIA Calculation DJIA = sum of component stock prices divided by a divisor where I t = Dow index value at time t, d t = divisor value at time t, and P (i,t) = price of component i at time t.

DJIA4 Introduction What: Is there a relationship between the Dow Jones set divisor and DJIA? Why: If there is, then the index is biased in that the divisor, which is determined by WSJ, can be set in such a way as to keep the DJIA levels relatively constant when prices of the components are in fact changing. An unbiased divisor should only reflect splits and dividends. How: Analyze daily prices of stocks and find the relationship between changes in DJIA and divisor.

DJIA5 Data Closing index values and prices at each operating day from November 1st, 1999 to November 22nd, 2002

DJIA6

7 Exploratory Analysis Is there a relationship between the change in the number of shares held for each individual stock versus the change in price? %  #shares =  (1) *%  S(1) +  ((2) *%  S(2)  ((30) *%  S(30) + C

8 Exploratory Analysis Call: lm(formula = shares ~ MMM + AA + T + AXP + CAT + C + KO + DD + EK + XOM + GE + GM + HPQ + HD + HON + INTC + IBM + IP + JPM + JNJ + MCD + MRK + MSFT + MO + PG + SBC + BA + DIS + UTX + WMT + 0, data = P) Residuals: Min 1Q Median 3Q Max Coefficients: Estimate Std. Error t value Pr(>|t|) MMM *** AA e-07 *** T < 2e-16 *** AXP e-05 *** CAT e-06 *** C e-14 *** KO DD e-12 *** EK XOM ** GE e-08 *** GM ** HPQ HD HON e-09 *** INTC * IBM

9 Exploratory Analysis IP e-10 *** JPM e-07 *** JNJ MCD MRK *** MSFT e-11 *** MO e-07 *** PG < 2e-16 *** SBC *** BA e-06 *** DIS UTX ** WMT * --- Signif. codes: 0 `***' `**' 0.01 `*' 0.05 `.' 0.1 ` ' 1 Residual standard error: on 738 degrees of freedom Multiple R-Squared: ,Adjusted R-squared: F-statistic: 1.875e+04 on 30 and 738 DF, p-value: < 2.2e-16

10 Exploratory Analysis

DJIA11 Exploratory Analysis

DJIA12 Linear Regression Graph

DJIA13 Statistical Analysis Call: lm(formula = DJI ~ shares, data = P) Residuals: Min 1Q Median 3Q Max Coefficients: Estimate Std. Error t value Pr(>|t|) (Intercept) e-06 *** shares < 2e-16 *** --- Signif. codes: 0 `***' `**' 0.01 `*' 0.05 `.' 0.1 ` ' 1 Residual standard error: on 766 degrees of freedom Multiple R-Squared: ,Adjusted R-squared: F-statistic: on 1 and 766 DF, p-value: < 2.2e-16 Formulas: %  DJIA =  *%  #shares + C %  DJIA = -0.74%  #shares

DJIA14 Conclusions There is a statistically significant relationship between the divisor values and the movements of DJIA across time. Effort to inflate index value above fair valuation?

DJIA15 Questions?