Information And Indicies Flashcards
1
Q
What are the features of an index? (5)
A
- Average: is often calculated on an arithmetic basis, not geometric
- Weighting: weighted vs unweighted - weighted is where shares in companies with the biggest total is important, unweighted is where shares with the highest price is important
- Used for comparisons and measuring performance
- Starts with a base value e.g. 1000, if this increases 1,100, the index has gone up by 10%
- All major stock exchanges calculate indices based on the shares traded on that exchange
2
Q
What is the use of indexes? (4)
A
- A tracker fund: used to match the movements of a chosen index e.g. S+P 500 ETF
- Unit trusts and CIS are established as tracker funds by match in constituents of specific indices
- This style of management is called ‘passive’
- An appropriate active style would be to beat a particular index using market timing and stock selection
3
Q
How are derivatives managed in light of indices? (2)
A
- Futures and options are based on stock market indices such as FTSE 100 index future
- These allow investors to speculate on the movement of the market in general rather than on the price of an individual security
4
Q
What is market cap? (4)
A
- Most indices are weighted towards market cap of companies
- Market cap = share price x the number of shares issued
- Not all indices are weighted by market cap - some are weighted towards price e.g. Dow Jones and NYSE
- LSE is weighted by market cap
5
Q
What are the 7 feature of an appropriate benchmark?
A
The benchmark should be:
- Consistent with the manager’s investment approach and style
- Measurable
- Unambiguous
- Securities and their respective weights should be clearly defined
- Benchmark should be reflective of the manager’s current investment opinions
- Manager should know about the securities on the benchmark
- Benchmark should be investable
6
Q
When does a benchmark fall under the scope of the EU Bechmark Regulation? (1)
A
- When it is used to determine the amount payable under a financial instrument or financial contract, or the value of a financial instrument
7
Q
What is the purpose of an EU benchmark? (4)
A
- Tracking the return of an investment fund
- Defining the asset allocation of a portfolio
- Computing the performance fees
- Recent amendments to the regulation prove for standardised provisions to deal with a statutory replacement of a benchmark rate - seen with the LIBOR rate
8
Q
What is a free float index? (3)
A
- One of the requirements of a benchmark is that it is investable - ‘free float’
- Shares that are availed to be purchased by the public - companies with low free float are more likely to have more volatile share price which may distort the index
- Index weighting will reflect the amount of free float shares available
9
Q
What’s the difference between stock indices and bond indices? (2)
A
- Stock = measure the increase in share prices e.g. LSE. Indices do not usually include dividends, focuses on the increase in capital value of the shares
- Bond = calculated as total return indices included both movement in prices and coupon income received. Index chosen will also normally reflect the characteristics of the portfolio being managed e.g. sector, duration etc.
10
Q
What are index numbers? (3)
A
- Tell use little about a market
- The change in index numbers tell us the percentage change in something e.g. price from a particular base
- Changes to an index are referred to in percentage points
11
Q
How is an index number created? (4)
A
- A base year and base value must be closed
- Base year = point in time you wish to monitor the members of the index form
- Base value = numerical starting point of the index (usually 100)
- Possible to create an index on any variable e.g. price of eggs
12
Q
What is re-basing an index? (3)
A
- If the index moves too far from it’s original base value, rebasing is necessary
- Achieved by re-setting the index to its base value
- Problem with this is that it makes comparisons with pervious years difficult
13
Q
What is a simple arithmetic index? (4)
A
- Calculated by adding up all the current prices of the members of an index and dividing it by the total sum of their value at the base date
- Result is multiplied by a base number representing the value of the index in the base year
- Reflects the value of an equally weighted portfolio of stocks
- E.g. Dow Jones and Nikkei 225
14
Q
What is a geometric index? (7)
A
- Measures the rate of change in the prices of the members of an index
- Multiples all the price relative of an index together and then takes the nth root of the answer
- Where there is change in capital, the divisor of each component must be altered, with a geomtric index only the base price is changed
- Geometric indices are less sensitive to large changes in the price of any one constituent than a simple arithmetic index
- If the price of any one constituent falls to zero, the value of the entire index falls to zero
- GIs will always be less than or equal to a simple arithmetic index - GIs tend to underestimate the performance of its constituents
- e.g. FT-30 Ordinary Shares
15
Q
What is a weighted index? (4)
A
- Seeks to give more influence to the shares of larger companies
- Unlike an equally weighted index, 1% change in price of a large company will have a greater effect on a weighted index than 1% change in price of a smaller company
- A large company is one with a higher market cap
- E.g. FTSE 100 and FTSE 200
16
Q
What are the UK indices? (5)
A
- FT 30 - equally weighted geometric mean of the prices of 30 leading UK stocks
- FTSE 100 - arithmetic average of top 100 UK companies based of market cap c70% of UK listed shares
- FTSE 250 - provides a benchmark for the next 250 after 100 largest UK companies based on market cap arithmetic average
- FTSE Actuaries 350 - A combination of FTSE 100 and FTSE 250. FTSE 350 is broken down into industries and calculated on a real time basis
- FTSE All-Share - main benchmark for UK fund managers. Market cap is a weighted arithmetic index covering 900 companies on LSE
17
Q
What are the US indices? (2)
A
- Dow Jones Industrial Average - DJIA is a simple underweighted arithmetic index. 30 largest industrial and non industrial stocks on the NYSE
- S+P 500 Index - market cap weighted arithmetic index of 500 US stocks. Broader base of US stocks that DJIA
18
Q
What are the European indices? (6)
A
- DAX 30 - main German index comprising 30 leading German stocks - weighted arithmetic index
- CAC 40 - 40 leading stock in Paris stock exchange - weighted arithmetic index
- SBF 250 - 250 French blue chips to provide wider overview of French economy
- FTSE Eurofirst - takes prices from local exchanges. Designed to provide derivative friend index by tracking liquid assets. AIM is to aid fund managers who may use the indices to track or hedge against the use of derivatives. Calculated in Euros rather than home currency. Weighted arithmetic index
- Eurotop 100 - Traded on Euronext-Amsterdam and ICE Futures Europe - tracks Europe’s largest 100 companies by market cap based on arithmetic mean
- STOXX - family of indices covering a variety of countries and over 50 industries. Market cap weighted arithmetic mean
19
Q
What are the Asian indices? (2)
A
- Nikkei: 225 biggest companies on Tokyo Stock Exchange - unweighted arithmetic index (price)
- S&P CNX - 50 largest liquid stocks in India’s Stock Exchange - weighted arithmetic index
20
Q
What are the Global indices? (1)
A
- FTSE All World - national stocks markets in local currency and US dollars - weighted arithmetic market value index
21
Q
What are the bond indices? (2)
A
- FTSE UK gilts - gilt index based on 12 other indices. 7 conventional gilt indices and 5 index linked gilt indices. Price reflects actual price performance of an equally weighted portfolio of all government bond issues. 5-15 years to redemption. Real yields are given for assumed inflation of 0% and 5%. Index linked indices which reflect all except the over 25 years category
- FTSE World Govt Bond Index - govt and corp bonds, US govt, MBS, ABS. EM, Global, Eurobond and Municipal
