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