Chapter 3A Tour of Risk and Performance

3.1 Introduction

On July 3, 1884, the Customer's Afternoon Letter (owned by Dow Jones & Co.) began publishing the first stock index: a simple price average of nine transportation companies and two industrial ones. In 1886 it published the first Dow Jones Industrial Average. In 1889, the newspaper became The Wall Street Journal, and over time more indices were created. Indices provided a benchmark against which to compare one's investment; and they are a summary of the overall behavior of the market or of a specific sector. A typical benchmarking exercise: if we hold a stock, on any given day we first look at the overall market return, as provided by the index, and then we compute the out- or underperformance of the stock compared to the market. When we look at indices as market summaries, we implicitly know that they describe most, or at least ...

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