Index Prices Flashcards
Equally weighted index
Formula
What is it assumes?
Numbers of shares doesn’t matter.
Current price
———————- x base value of index
Past price
ASSUMES that will have an equal cash investment is made in each stock
VALUE of an index
Base value x (1+ positive returns) x (1-negative returns)
Index Rate of return
(1+positives returns) ( 1- negative returns) -1
What is Fundamentals Weighted Index
Mainly characteristic (weight)
Based on fundamentals = P/E, Book To Value.
MORE weight to stocks with low P/E
others words
Most influenced by “value based” : earnings, dividends, P/B
Price Wighted Index formula
Sum of Stock Prices
——————————-
Number of stocks in index adjusted for splits
Market Value Weighted index assumes
That you are doing a proportional market value investment in each company in the index
Mainly difference between price return and total return
Income generate by the assets
What composes Value of a total return index?
What about cash flows, they can be negativa?
Geometrically linked series of total returns
Including cash flows
CANNOT increase at slower rate or decrease
Cash flows cannot be negatives
Style index is composed by groups classified as:
1 ) Market capitalization (Dow jones)
2) Value
3) Growth
Sector index is…
Measure a performance os securities in a specific industry or industries
What is the denominator of Value Wighted index
(Market cap index)
Free float (market float)
Different, for example, of price index
In a a security index, what represents the market performance
The percent in index change
How does a Security Market index is managed and constructed?
Constructed and managed like a portfolio of securities
Most common method of weight for hedge funds
Equal weighted
Most common method for Equity Index
Market capitalization weight
Most common method for fixed income securities
Market weighted capitalization
Phases of a index constructing (4)
TCMR
- Target market
- Construct an index
.Select the securities to use from the target market
. Method of weighting
- Managing the index
When rebalancing
- Reconstitution of an index
Requires one of its securities goes out of existence
Commodity index 3 major factors that affects returns
Risk free
Change in futures prices
Roll yield
Commodity index are represented by future contracts or spot prices?
Future contacts, not spot prices
Commodity index methodology of price
Equal weighting or
Global production value
But not a specific one
Calculation of Price / market weighted
(Price ending x Qntds) - (price beginning x qnts)
———————————————————
Beginning price x qntds
Wich of the weightings methods requires the most frequent rebalancing?
Equal Weighting
Sector index provides what about active investment managers?
Means to determine if an active investment manager is
more successful at stock allocation or sector allocation
Aggregate fixed income index Can by subdivided by what sectors?
MARKET SECTOR
Governament
Governament agencies
Collateralized
Corporate
STYLE
Maturity
Credit
Quality
ECONOMIC SECTOR
Examples of real state categories index
Appraisal index
Repeat sales index
Carecteristics Price Weight Inde
Stock splits DECREASES weight in index
Most influenced by high priced
Market capitalization weight Caracteristics
(Value weighted)
Stocks weights goes up and down with
MAKET CAPITALIZATION
Momentum strategy
Exemple of a Value Tilt ( more representative in index)
Fundamental weighted index
Ex. Looking to a book values companies.
High book values = to high weight in the index
Fixed income index
Illiquid assets
Not traded with frequency
Construction with Dealers (prices)
