CFA 46: Security Market Indices

Question 1

security market index

Index Definition and Calculations of Value and Returns

Answer 1

A portfolio of securities representing a given security market, market segment, or asset class.

Question 2

constituent securities

Index Definition and Calculations of Value and Returns

Answer 2

With respect to an index, the individual securities within an index.

Question 3

price return index (or, price index)

Index Definition and Calculations of Value and Returns

Answer 3

An index that reflects only the price appreciation or percentage change in price of the constituent securities.

Question 4

total return index

Index Definition and Calculations of Value and Returns

Answer 4

An index that reflects the price appreciation or percentage change in price of the constituent securities PLUS an income received since inception.

Question 5

divisor

Index Definition and Calculations of Value and Returns

Answer 5

A number (denominator) used to determine the value of a price return index. It is initially chosen at the inception of an index and subsequently adjusted by the index provider, as necessary, to avoid changes in the index value that are unrelated to changes in the prices of its constituent securities.

Question 6

price return

Index Definition and Calculations of Value and Returns

Answer 6

Measures ONLY the price appreciation

Question 7

total return

Index Definition and Calculations of Value and Returns

Answer 7

Measure the price appreciation, or percentage change inp rice of the securities in an index or portfolio, plus any income received over the period.

Question 8

price weighting

Index Construction and Management

Answer 8

An index weighting method in which the weight assigned to each constituent security is determined by dividing its price by the sum of all the prices of the constituent securities.

Question 9

equal weighting

Index Construction and Management

Answer 9

An index weighting method in which an equal weight is assigned to each constituent security at inception.

Question 10

market-capitalization weighting

Index Construction and Management

Answer 10

An index weighting method in which the weight assigned to each constituent security is determined by dividing its market capitalization by the total market capitalization (sum of the market capitalization) of all securities in the index. Also called “value weighting”.

Question 11

float-adjusted market-capitalization weighting

Index Construction and Management

Answer 11

An index weighting method in which the weight assigned to each constituent security is determined by adjusting its market capitalization for its market float.

Question 12

market float

Index Construction and Management

Answer 12

The number of shares that are available to the investing public.

Question 13

fundamental weighting

Index Construction and Management

Answer 13

An index weighting method in which the weight assigned to each constituent security is based on its underlying company’s size. It attempts to address the disadvantages of market-capitalization weighting by using measures that are independent of the constituent security’s price.

Question 14

rebalancing

Index Construction and Management

Answer 14

Adjusting the weights of the constituent securities in an index.

Question 15

reconstitution

Index Construction and Management

Answer 15

The process of changing the constituent securities in an index.

Question 16

uses of market indices

Answer 16

-Gauges of market sentiment

-Proxies for measuring and modeling returns, systematic
risk, and risk-adjusted performance

• Proxies of asset classes in asset allocation models
• Benchmarks for actively managed portfolios
• Model portfolios for such investment products as index funds and exchange-traded funds (ETFs)

Question 17

multi-market indices

Equity Indices

Answer 17

Comprise indices form different countries and are designed to represent multiple security markets. Multi-market indices may represent multiple national markets, geographic regions, economic development groups, and in some cases, the entire world.

Question 18

sector indices

Equity Indices

Answer 18

Represent and track different economic sectors-such as consumer goods, energy, finance, health care, and technology-on either a national, regional, or global basis.

Question 19

style indices

Equity Indices

Answer 19

Represent groups of securities classified according to market capitalization, value, growth or a combination of these characteristics. They are intended to reflect the investing styles of certain investors, such as the growth investor, value investor, and small-cap investor.

Question 20

hedge funds

Indices for Alternative Investments

Answer 20

Private investment vehicles that typically use leverage and long and short investment strategies.