Chapter 15: Indices Flashcards
Explain what is meant by:
Chain linking
Free float
Chain linking
Process used to maintain continuity in index value when number of shares issued by constituent company changes
Many arise due to rights issues/share buybacks, shares entering/leaving index
Free float
Percentage of shares freely available for purchase on open market
Excludes strategic holding
Explain with the aid of a formula what the ex dividend adjustment represents
Ex dividend adjustment
Represents accumulated total of dividends paid by constituent companies in index from start of calendar year to current date
Eight factors to consider when constructing an index
\+Purpose of index \+Constituents and basis for inclusion/exclusion \+type of index \+Price data used \+frequency of calculation \+base date and value \+how to deal with capital changes \+how to deal with income
List the eight main uses of indices
Benchmark against to assess investment performance of portfolios
Valuing notional portfolio
Basis for derivatives relating to market or sub-section of market
basis for index tracker funds
charting long term history of market movements and levels
estimating future market movements and levels
Measuring of short term market movements
analysing sub-sectors of the market
List 4 further uses of government bond indices
Yield indices
Provided standard against which yields on other fixed interest investments can be assessed
summarise yield curve
indicate size of the yield gap between bonds and equities
Price indices
Can be used for approximate valuation of fixed interest portfolio
Describe how the FTSE equity indices are calculated and list 6 figures, in addition to the capital value index, which are provided in respect of each FTSE index
Calculated on weighted arithmetic average basis with market capitalisation as weights
weightings based on free floats
In addition to capital value index indicates also give
Total return index Average dividend cover Actual dividend yield price earnings ratio ex dividend adjustment euro value index
Outline the following indicies
FTSE 100
FTSE 250
FTSE 350 Supersectors
FTSE 100
Consists of 100 largest quoted companies by market capitlisation accounting for about 80 per cent of total UK equity market capitalisation
FTSE 250
Covers next 250 companies ranking below top 100 companies by market capitalisation
FTSE 350 Supersectos
Combines 100 and 250 indicies and accounts for over 90 percent of total UK equity market. Sub - indices also calculated for high yielding and low yielding stocks
Outline the coverage of the following indices
FTSE SmallCap
FTSE All share
FTSE Fledging
FTSE AIM
FTSE SmallCap
Covers all companies below top 350 with market capitalisation greater than certain limit and whose shares are actively traded
FTSE All share
Comprises 350 and SmallCap indicies, and accounts for around 98 - 99 per cent of total overall market capitalisation
FTSE Fledging
Consists of remaining, sufficiently marketable, quoted companies that are too small to be included in SmallCap index
FTSE AIM
Covers some 1000 companies traded in Alterative Investment Market
These are companies too small or too new to apply for full listing
Describe the FTSE gilts index series
Cover coventional and index linked gits
Both price and yield indices published, with price indicies being subdivided according to term and yield indicies subdivided according to term and coupon
Index number calculated using dirty prices ie inclusive of accured interest
Accrued interest and XD adjustment published for price index series
Describe the coverage and construction of the FTSE global equity indicies
Cover 8000 securities in 48 markets
Capture around 98% of world’s equit markets by investible market capitalisation
Indicies divided into 3 segments: Developed, advanced emerging and secondary emerging
Stocks not available to foreign investors excluded from indicies, making them suitable for performance measurement
indicies calculated in US dollar and local currency
weighted arithmetic capital value indices, based on free floats
Describe briefly the two main US equity indicies
Dow Jones Industrial Average
Unweighted arithmetic index based on only 30 industrial shares
Unsuitable for performance measurement
Standard & Poor’s Composite Index (S&P 500)
Weight arithmetic index
Constituents are 500 leading companies in USA representing broad cross - section of all sectors of market
Often suitable for performance measurement of portfolio of US equities
Describe briefly the 2 main Japanese indicies
Nikkei Stock Average 225
Unweighted arithmetic index
Consistuents reviewed annually, but unrepresentative of Japanese Equity market
Not suitable for performance measurement
Tokyo Stock Exchange First Section Index (Topix)
Comprises about 1700 shares
Market capitalisation weighted arithmetic index
Constituents represent leading companies in market
Much more comprehensive than Nikkei
Suitable for performance measurement
State the two key problems when constructing property indicies and list the 6 problems in obtaining market values for constituents of property indicies
Two key problems when constructing property indices
Lack of reliable and up to data on property prices
Heterogeneity of properties
Six problems obtaining
Each property is unique
Market value of property only known for certain at sale
Estimation of value is subjective and expensive process
Valuations carried out at different points in time
Sales of certain types of investment property relatively infrequent
Sale prices treated with degree of confidentiality
Distinguish between the 2 main types of property index
Property Indices
measures rental values, capital values or total returns of actual portfolio of rented properities
responds slowly to movements in rental values
behaves like actual property portfolio
Sometimes calculated on money weighted basis
Barometer index
Based on estimates of hypothetical rack rents
responds quickly to market conditions
useful indicator of short term movements in rents and yields
unsuitable for performance measurement
Explain what an equity volatility index is and list the two main ways they may be calculated
Rather than recording market movements in equity prices or total returns these measure the volatility of equities
As such volatility indicies are typically used as an indication of the market perception of risk
They may be calculated in two ways
By using historical equity price movements
by using the volatility implied by option prices based on the equity being considered
