What it is:
A market proxy is a variable that theoretically simulates the behavior of the overall market.
How it works (Example):
Analysts and investors use market proxies as part of statistical analyses and portfolio modeling. Analysts and investors also use market proxies as benchmarks for comparing the performance of a stock to that of the market. A market index, such as the Dow Jones Industrial Average (DJIA), is an example of a market proxy.
Why it Matters:
A market proxy is a purely theoretical representation and cannot fully reflect the entire range of price movements for all market sectors. For instance, the Dow Jones Industrial Average only serves as an accurate market proxy for gauging the average performance of the 30 stocks that make up the Dow. A portfolio with a wide range of stocks and other assets would require a more sophisticated market proxy.