Determining what index to Use

Studies have demonstrated that all these indexes area interrelated this means that all them fluctuate in the same direction. However, there some differences. Indexes like NASDAQ and AMEX are not interrelated with S&P 500 Index and the DJIA. This makes sense because the companies listed in AMEX stock index and NASDAQ are newer, smaller and more risky than those listed in S&P 500 and the DJIA. What’s best in this case is that you can choose the index that best suits your portfolio.

Individual market measures are convenient indicators of market stocks indicating also the direction the market will follow in a certain time period. In using these market indexes you may compare how well is each individual stock and mutual fund performing in relation to the market indicators for that same period.

Giving sense to risk and return stock measures: As said previously a diversified portfolio with 20 or 40 stocks reduces the non systematic risk proportion in a portfolio leaving only a part of the systematic risk.

By reducing risks return variability should diminish within the portfolio. However, the market risk does not reduce due to diversification, but having a long term horizon it may a portion of this risk. If there is a market turndown within a short term you would have to sell your stocks at lower prices while with a long term horizon you would be able to liquidate your stocks having got a hogher price for your valuables.

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