COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 175

"Stock Market Indices: A Principal Components Analysis"

George J. Finney and Donald D. Hester

1964

This paper investigates a widely quoted stock market index, the Dow Jones Industrial Average (hereafter DJI), and constructs some alternative indices. Their performances are compared to the DJI. The question of applying the indices to problems of portfolio selection is explored when investors’ utility functions are quadratic in the rate of return. By constructing indices from data collected in different time periods, some conclusions are drawn about the constancy of price and rate of return covariance and correlation matrices of the 30 Dow Jones Industrial stocks over time.