Chapter 12 Flashcards
How are indices constructed
- Market value weighted or market cap - most indices are this. S&P500, FTSE All World, MSCI. Multiplies share price by number of shares. Adjusted for free float.
- Price Weighted - Dow Jones. Average of current prices divided by number of stocks. Has a divisor.
- Unweighted or equally weighted - equal investment in each stock in the index is assumed. Primarily used for academics.
What’s is Free Float
Includes only the proportion of a company’s shares that are available for trading within an index. Excludes promoters holdings, government holdings, strategic holdings and other locked in shares that won’t come to market during the normal course of trading.
Contract Notes
Must be issued to the client as soon as possible and no later than the business day following the receipt.
If a trade is executed after close of business then it’s treated as taking place the following day and the clock starts from then.
Types of Benchmark
Absolute
Used where the objective is to exceed a minimum target return
Manager universes
Users appear group average to determine the benchmark by taking the performance of the median manager from a set as the benchmark
Broad market indices
Such as MSCI world index S&P 500 or FTSE all share
Style indices
A portion of available securities within an category that can be grouped together such as large cap or small cap
Factor models
Relates one or more systematic sources of returns to returns of the benchmark. might be performance of the market the sector or company size
Return based
Compare a managers return to returns of style indices that best explain the manager returns
Custom based
A selection of securities that best reflects the investment managers approach to produce composite or synthetic benchmark
Reporting statement
Must be issued quarterly if discretionary management is used
Must be issued every 6 months if advisory management is used. Annual report must also be issued detailing trades on a transaction by transaction basis.
Must be issued monthly if any leverage is used.
Active Return
The difference between portfolio return and the benchmark return.
