This is why I use a randomly weighted average. It takes a bit of getting used to, but it's worth the effort.
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Why that instead of market cap weighted?
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Pretty sure he is joking.
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So how much money have you made betting against DJIA and S&P 500 correlation?
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And how much money have you made betting against dice roll and DJIA correlation?
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None. Strangely, no one will take the other side of that contract. Let me know if you're up for it though!
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Plenty of people would take it for the right price. That price doesn't make you a profit, though. Almost... like... one... can't... profit... off... randomness. Funny how that works.
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But you can profit off the insight that weighting an index by the capitalization of its components produces a better signal than not doing so. People had this insight, they profited, and 60 years ago they created the S&P500, which is such a weighted index.
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So if you want to say that market participants are irrational, don't understand statistics, and you know better, great! I hope you make lots of money by teaching us how to price correlation better!
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A number is just a number; that people talk about it doesn't make it important, & observing that it's a dumb number isn't the claim that it's creating *market* inefficiencies which can be exploited. If a journalist talks too much about the DJIA, how do you make money, pray tell?
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Sell correlation swaps on DJIA and S&P500 https://en.wikipedia.org/wiki/Correlation_swap …. If the market is mispricing the effect of journalists talking about DJIA instead of S&P500 (say by effecting their audience's trades), then you can make money when DJIA and S&P vary more than expected.
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Well what do you expect them to do? Talk about the S&P500 instead???
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Optimal weighting schemes are overrated. Non-crazy weighting mostly suffices.
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In the immortal words of the prophet Christine McVie "Tell me lies. Tell me sweet little lies." We deceitfully cherrypick our data for comfort and ease of digestion while actively blocking disturbing and complicated sets that put an intellectual metabolic load on our tired brainspic.twitter.com/vKOE6lbqO6
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Agreed - but what is correlation with the intelligently weighted S&P500 -- isn't it remarkably high?
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When you can explain >95% of the variance in any one stock's movement by the overall market move - No. You'd get a more accurate, if sightly more volatile barometer by picking any one blue-chip stock at random and using that as your proxy.
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I was 7 years old (in 1973) when my father (an engineer & attorney) explained this to me. Many people are idiots...idiots want simple ways to comprehend complexity and therefore to "win" ... ergo the Dow as a benchmark
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Honestly though the correlation with the S&P is high enough it’s hard to care that much
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Let's hear it for the S&P 500!
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No it' It's also that the WSJ owns it so always lists it first.
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