Chapter 14: Investment indices

Question 1

ex-divididend or XD adjustment

Answer 1

An ex-dividend or XD adjustment represents the amount of income that has been received since the start of the year by a capital value index.

Question 2

Geometric index features (3) (advantages and disadvantages)

Answer 2

1. the index goes to zero if one of the components goes to zero.
2. easy to calculate as only price data is required
3. gives an indication of short-term price movements, but it is totally unsuitable as a benchmark or investment strategy or portfolio investment measurement.

Question 3

Uses of indices (8)

Answer 3

1. a measure of short-term market movements
2. providing a history of market movement and levels
3. as a tool for estimating future movements in the market, based on past trends
4. as a benchmark against which to assess the investment performance of portfolios
5. valuing a notional portfolio
6. analysing sub-sectors of the market
7. as a basis for index funds which track the particular market
8. to provide the basis for the creation of derivative instruments relating to the market or sub-section of the market.

Find acronym

“INDEXERS”

Index (basis for index funds and tracking market performance)
Notional (valuing a notional portfolio)
Derivatives (basis for creating derivative instruments)
Estimation (estimating future market movements based on past trends)
X-short term market moves
Evaluation (benchmarking against investment performance)
Record (providing a history of market movement and levels
Sectors (analyzing sub-sectors of the market)

Question 4

Particular uses for Bond indices: (4)

Answer 4

1. a standard against which yields on other fixed-interest investments can be assessed
2. approximate valuation for a fixed-interest portfolio
3. providing a picture of general yield structures of fixed-interest investments
4. a measure of the yield gap between bonds and equities

Question 5

FTSE UK Index Series features: (5)

Answer 5

1. Market capitalisation weighted arithmetic indices
2. FTSE 100 index - is based on the 100 largest companies and covers about 80%
3. FTSE 100 is the most widely quoted of the FTSE UK Index Series
4. The FTSE All-share index covers about 98% of the market by value.
5. The FTSE Aim Index series - covers companies traded in the UK Alternative Investment Market

Question 6

Dow Jones Industrial Average

Answer 6

1. Made up of 30 leading New York shares.
2. It is an unweighted arithmetic index
3. Provides a quick guide to shares in the industrials sector
4. It is not representative of the American equity market as a whole.

Question 7

Standard & Poor’s 500 Index

Answer 7

1. It is a weighted arithmetic index
2. Its constituents are 500 leading companies in the USA
3. It is often suitable to use for performance measurement of a funds portfolio of USA equities

Question 8

Nikkei Stock Average 225: (3)

Answer 8

1. it is an unweighted arithmetic index.
2. it has 225 constituents (which are not the largest 225 companies and represent 50% of the market)
3. It is the most widely used indicator of short-term movements in the Japanese market.

Question 9

Topix - Tokyo Stock Exchange First Section Index: (4)

Answer 9

1. comprises of approximately 1700 shares listed in Japan
2. it is a market capitalisation weighted arithmetic index
3. the constituents represent the leading companies in the Japanese market.
4. the index is more suitable for use in performance measurement.

Question 10

DAX

Answer 10

The DAX is a real-time index of thirty leading shares.

It is a total return index.

Question 11

CAC

Answer 11

It is the main market index in France, comprising 250 shares

Question 12

The FTSE/JSE Africa Headline indices (5)

Answer 12

1. FTSE/JSE ALSI (All Share Index) consisting of 99% of all listed companies.
2. Top 40 - consisting of 40 largest stocks, constituting around 84% of the ALSI.
3. MId-cap index - mad up of stocks from position 41 to 100, and around 14% of he ALSI.
4. Small cap index - made up of stocks from position 101, and about 2% of the ALSI.
5. Fledgling Index - consisting of the 1% of listed companies not interluded in the ALSI.

Question 13

VIX

Answer 13

this a volatility equity index which measures the volatility of equities.

It is typically used as an indication of the market perception of risk.

Question 14

FTSE Global Equity Index: (3)

Answer 14

1. covers over 98% of the world’s equity markets in terms of investible market capitalisation.
2. The indices are weighted arithmetic indices based on market capitalisations and reflect free float weightings.
3. Index numbers are shown for each country in US dollar and the local currency.

Question 15

Property price indices are very difficult to maintain because: (2)

Answer 15

1. there is little reliable, up-to-date price data for properties at any one moment.
2. properties tend to be very heterogeneous

Question 16

The problem involved with obtaining market values for property: (6)

Answer 16

1. Each property is unique
2. The market value of a property is only known for certain when the property changes hands.
3. Estimation of value is a subjective and expensive process.
4. Valuations will be carried out at different points in time.
5. Sales of certain types of investment property are relatively infrequent.
6. The prices agreed between buyers and sellers of properties are normally treated with a degree of confidentiality.

Question 17

Other numbers given in each of the indices (in the FTSE UK Index Series) in addition to the capital and total return index numbers: (4)

Answer 17

1. average net dividend cover
2. actual dividend yield
3. price earnings ratio
4. ex-dividend adjustment

Question 18

FTSE 100 Index (4)

Answer 18

1. This consists of the 100 largest quoted companies by market capitalisation…
2. … accounting for about 80 per cent of the total UK equity market capitalisation.
3. It is the main indicator of short-term movements in the UK equity market.
4. It is used extensively as a basis for investment products, such as derivatives and exchange-traded funds.

Question 19

FTSE 250 Index

Answer 19

This index covers the 250 UK companies ranking below the top 100 companies by market capitalisation.

Question 20

FTSE 350 Supersectors Index

Answer 20

This combines the FTSE 100 and FTSE 250 indices.

Question 21

FTSE SmallCap Index (2)

Answer 21

1. This index covers all companies below the top 350 companies with a market capitalisation greater than a certain limit and whose shares are actively traded.
2. It currently represents around 2% of the UK market capitalisation.

Question 22

FTSE All-Share Index

Answer 22

1. This comprises the 350 and the SmallCap indices.

2. It accounts for around 98 - 99 per cent of the total overall market capitalisation.

Question 23

FTSE Fledgling index

Answer 23

This index consist of the remaining, sufficiently marketable, quoted companies which are too small to be included in the SmallCap index.

Question 24

FTSE Aim Index Series

Answer 24

1. This series of indices covers companies traded in the UK Alternative Investment Market.
2. These are companies which are too small or too new to apply for a listing.
3. The indices are calculated on a free-float basis.

Question 25

ALBI (All Bond Index): (4)

Answer 25

1. This is the main fixed-interest bond index in South Africa.
2. It is a composite index containing the top 20 fixed-interest bonds ranked dually by liquidity and market capitalisation.
3. The ALBI is split into two sub-indices, the GOVI (Government Bond Index) comprising the top 10 government bonds issued, and the OTHI (Other Bond Index).
4. The ALBI is further split into four sub-indices based on term to maturity ( 1 - 3yr, 3 -7yr, 7 - 12yr, 12+yr).

Question 26

The constituents and weightings of the ALBI are changed in the following circumstances: (2)

Answer 26

1. Bond weightings change monthly based on issuance during the period.
2. Constituent changes are effected quarterly.

Question 27

CILI (Composite Inflation Linked Index):

Answer 27

1. This is the main inflation-linked bond index in South Africa.
2. It is split into three sub-indices to reflect bonds issued by Government (IGOV), State owned enterprises (ISOE) and corporates (ICORP).
3. the CILI is further split into four sub-indices based on term to maturity ( 1 - 3yr, 3 -7yr, 7 - 12yr, 12+yr).

Question 28

The Short Term Fixed Interest (STeFI) Composite index comprises of: (4)

Answer 28

1. 15% of the STeFI Call Deposit Index which is based on an Interbank Call rate.
2. 30% of the STeFI 3 month NCD Index which is based on 3 month NCD instruments.
3. 35% of the STeFI 6 month NCD Index which is based on 6 month NCD instruments.
4. 20% of the STeFI 12 month NCD Index which is based on 12 month NCD instruments.

Question 29

International bond indices include: (2)

Answer 29

1. FTSE global bond index series

2. Markit iBoxx fixed income indices

Question 30

Credit Indices produced by the JSE for listed corporate bonds: (3)

Answer 30

1. Credit Fixed
2. Credit Floating
3. Credit composite

Question 31

The main families of CDS indices: (2)

Answer 31

1. iTraxx

2. CDX

Question 32

What is IPD

Answer 32

IPD is a leading index provider for commercial property indices.

Question 33

Barometer property indices

Answer 33

The barometer type of index aims to track movements in the property market at large by estimating the maximum full rental values of a number of hypothetical rack-rented properties.

Question 34

In addition to capital and total return numbers the FTSE UK Index Series give: (4)

Answer 34

1. average net dividend cover
2. actual dividend yield
3. price earning ratio
4. ex-dividend adjustment

Question 35

List four circumstances in which chain-linking would be required: (4)

Answer 35

1. a rights issue or a share buy-back by a constituent company
2. a new issue of a share in the sector covered by the index - e.g. newly-formed company, privatisation, demutaulisation
3. a merger, take over or break-up involving a constituent company or companies
4. a change in the constituent companies in an index, resulting from a change in relative market capitalisatons due to share price movements, e.g. exclusion or introduction of a share to the JSE Top40

Question 36

Factors to be considered in creating an index: (7)

Answer 36

1. purpose of the index
2. constituents and basis for inclusion/exclusion
3. type of index (e.g. weighted arithmetic)
4. frequency of calculation
5. price data to use (e.g. mid-market prices)
6. how to deal with capital changes (e.g. chain-linking)
7. what to do about income (e.g. XD adjustments, total returns indices)

Question 37

European Indices:

Answer 37

1. FTSE Eurotop 100
2. FTSEurofirst 300
3. Dow Jones Eurostoxx 50

Question 38

Two main types of investment property index: (2)

Answer 38

1. portfolio-based indices

2. barometer indices

Question 39

Describe Portfolio-based indices

Answer 39

Portfolio-based indices measure rental values, capital values or total returns of actual rented properties.