Chapter 14: Investment indices Flashcards
ex-divididend or XD adjustment
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.
Geometric index features (3) (advantages and disadvantages)
- the index goes to zero if one of the components goes to zero.
- easy to calculate as only price data is required
- gives an indication of short-term price movements, but it is totally unsuitable as a benchmark or investment strategy or portfolio investment measurement.
Uses of indices (8)
- a measure of short-term market movements
- providing a history of market movement and levels
- as a tool for estimating future movements in the market, based on past trends
- as a benchmark against which to assess the investment performance of portfolios
- valuing a notional portfolio
- analysing sub-sectors of the market
- as a basis for index funds which track the particular market
- to provide the basis for the creation of derivative instruments relating to the market or sub-section of the market.
Particular uses for Bond indices: (4)
- a standard against which yields on other fixed-interest investments can be assessed
- approximate valuation for a fixed-interest portfolio
- providing a picture of general yield structures of fixed-interest investments
- a measure of the yield gap between bonds and equities
FTSE UK Index Series features: (5)
- Market capitalisation weighted arithmetic indices
- FTSE 100 index - is based on the 100 largest companies and covers about 80%
- FTSE 100 is the most widely quoted of the FTSE UK Index Series
- The FTSE All-share index covers about 98% of the market by value.
- The FTSE Aim Index series - covers companies traded in the UK Alternative Investment Market
Dow Jones Industrial Average
- Made up of 30 leading New York shares.
- It is an unweighted arithmetic index
- Provides a quick guide to shares in the industrials sector
- It is not representative of the American equity market as a whole.
Standard & Poor’s 500 Index
- It is a weighted arithmetic index
- Its constituents are 500 leading companies in the USA
- It is often suitable to use for performance measurement of a funds portfolio of USA equities
Nikkei Stock Average 225: (3)
- it is an unweighted arithmetic index.
- it has 225 constituents (which are not the largest 225 companies and represent 50% of the market)
- It is the most widely used indicator of short-term movements in the Japanese market.
Topix - Tokyo Stock Exchange First Section Index: (4)
- comprises of approximately 1700 shares listed in Japan
- it is a market capitalisation weighted arithmetic index
- the constituents represent the leading companies in the Japanese market.
- the index is more suitable for use in performance measurement.
DAX
The DAX is a real-time index of thirty leading shares.
It is a total return index.
CAC
It is the main market index in France, comprising 250 shares
The FTSE/JSE Africa Headline indices (5)
- FTSE/JSE ALSI (All Share Index) consisting of 99% of all listed companies.
- Top 40 - consisting of 40 largest stocks, constituting around 84% of the ALSI.
- MId-cap index - mad up of stocks from position 41 to 100, and around 14% of he ALSI.
- Small cap index - made up of stocks from position 101, and about 2% of the ALSI.
- Fledgling Index - consisting of the 1% of listed companies not interluded in the ALSI.
VIX
this a volatility equity index which measures the volatility of equities.
It is typically used as an indication of the market perception of risk.
FTSE Global Equity Index: (3)
- covers over 98% of the world’s equity markets in terms of investible market capitalisation.
- The indices are weighted arithmetic indices based on market capitalisations and reflect free float weightings.
- Index numbers are shown for each country in US dollar and the local currency.
Property price indices are very difficult to maintain because: (2)
- there is little reliable, up-to-date price data for properties at any one moment.
- properties tend to be very heterogeneous
The problem involved with obtaining market values for property: (6)
- Each property is unique
- The market value of a property is only known for certain when the property changes hands.
- Estimation of value is a subjective and expensive process.
- Valuations will be carried out at different points in time.
- Sales of certain types of investment property are relatively infrequent.
- The prices agreed between buyers and sellers of properties are normally treated with a degree of confidentiality.
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)
- average net dividend cover
- actual dividend yield
- price earnings ratio
- ex-dividend adjustment
FTSE 100 Index (4)
- This consists of the 100 largest quoted companies by market capitalisation…
- … accounting for about 80 per cent of the total UK equity market capitalisation.
- It is the main indicator of short-term movements in the UK equity market.
- It is used extensively as a basis for investment products, such as derivatives and exchange-traded funds.
FTSE 250 Index
This index covers the 250 UK companies ranking below the top 100 companies by market capitalisation.
FTSE 350 Supersectors Index
This combines the FTSE 100 and FTSE 250 indices.
FTSE SmallCap Index (2)
- 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.
- It currently represents around 2% of the UK market capitalisation.
FTSE All-Share Index
- This comprises the 350 and the SmallCap indices.
2. It accounts for around 98 - 99 per cent of the total overall market capitalisation.
FTSE Fledgling index
This index consist of the remaining, sufficiently marketable, quoted companies which are too small to be included in the SmallCap index.
FTSE Aim Index Series
- This series of indices covers companies traded in the UK Alternative Investment Market.
- These are companies which are too small or too new to apply for a listing.
- The indices are calculated on a free-float basis.
ALBI (All Bond Index): (4)
- This is the main fixed-interest bond index in South Africa.
- It is a composite index containing the top 20 fixed-interest bonds ranked dually by liquidity and market capitalisation.
- 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).
- The ALBI is further split into four sub-indices based on term to maturity ( 1 - 3yr, 3 -7yr, 7 - 12yr, 12+yr).
The constituents and weightings of the ALBI are changed in the following circumstances: (2)
- Bond weightings change monthly based on issuance during the period.
- Constituent changes are effected quarterly.
CILI (Composite Inflation Linked Index):
- This is the main inflation-linked bond index in South Africa.
- It is split into three sub-indices to reflect bonds issued by Government (IGOV), State owned enterprises (ISOE) and corporates (ICORP).
- the CILI is further split into four sub-indices based on term to maturity ( 1 - 3yr, 3 -7yr, 7 - 12yr, 12+yr).
The Short Term Fixed Interest (STeFI) Composite index comprises of: (4)
- 15% of the STeFI Call Deposit Index which is based on an Interbank Call rate.
- 30% of the STeFI 3 month NCD Index which is based on 3 month NCD instruments.
- 35% of the STeFI 6 month NCD Index which is based on 6 month NCD instruments.
- 20% of the STeFI 12 month NCD Index which is based on 12 month NCD instruments.
International bond indices include: (2)
- FTSE global bond index series
2. Markit iBoxx fixed income indices
Credit Indices produced by the JSE for listed corporate bonds: (3)
- Credit Fixed
- Credit Floating
- Credit composite
The main families of CDS indices: (2)
- iTraxx
2. CDX
What is IPD
IPD is a leading index provider for commercial property indices.
Barometer property indices
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.
In addition to capital and total return numbers the FTSE UK Index Series give: (4)
- average net dividend cover
- actual dividend yield
- price earning ratio
- ex-dividend adjustment
List four circumstances in which chain-linking would be required: (4)
- a rights issue or a share buy-back by a constituent company
- a new issue of a share in the sector covered by the index - e.g. newly-formed company, privatisation, demutaulisation
- a merger, take over or break-up involving a constituent company or companies
- 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
Factors to be considered in creating an index: (7)
- purpose of the index
- constituents and basis for inclusion/exclusion
- type of index (e.g. weighted arithmetic)
- frequency of calculation
- price data to use (e.g. mid-market prices)
- how to deal with capital changes (e.g. chain-linking)
- what to do about income (e.g. XD adjustments, total returns indices)
European Indices:
- FTSE Eurotop 100
- FTSEurofirst 300
- Dow Jones Eurostoxx 50
Two main types of investment property index: (2)
- portfolio-based indices
2. barometer indices
Describe Portfolio-based indices
Portfolio-based indices measure rental values, capital values or total returns of actual rented properties.
