LM 2: Security Market Indices Flashcards
What is a security market index?
index that represents a market segment or asset class
What is a constituent securities?
individual securities that make up an index
What is a divisor?
a divisor is a convenient initial level to compare performance
How do you calculate index value over multiple time periods?
link returns geometrically if over multiple time periods.
Eg.
Initial Value: 1,000
Return 1: 4%
Return 2: -3%
Return 3: 7%
1000 * (1.04) * (0.97) * (1.07) = 1079.42
What is the difference between price return and total return?
price return is based on price ending period and beginning period.
total return includes income as well as price ending period and beginning period
What is price return formula?
PRi = Pi1 - Pi0 / Pi0
What is total return formula?
TRi = (Pi1 - Pi0 + Inc1) / Pi0
Whats the formula for calculating the price returns for an index given different weight and returns?
PR1 = w1PR1 + w2PR2 + + wN*PRN
N= number of stocks
Whats the formula for calculating the total returns for an index given different weight and returns?
TR1 = w1TR1 + w2TR2 + + wN*TRN
When selecting or creating an index what 3 things must you decide on? TIR
- target market & security selection
- index weighting
- rebalancing and reconstitution.
What are 4 types of index weighting? PEMF
- price weighting
- equal weighting
- market capitalization weighting
- fundamental weighting
What is price weighting and formula?
weights each constituent security based on its price as a share of the sum of all the constituent security prices.
Total ending share price - total beginning share price / total beginning share price = weighting
What is equal weighting index?
each stock given the same weight in index
What is market capitalization weighting (aka value weighting)?
weight of each security is its market capitalization divided by the total market capitalization of all constituent securities.
What is fundamental weighting?
uses a measure of company size not dependent on security price. eg book value, revenues, etc.
What is reconstitution?
process in which the manager reviews and makes changes to the constituent securities.
What are broad market indexes and what does the performance of broad market indexes represent?
index is considered to be broadly representative if it includes 90% or more of a market’s equities.
broad market indexes represent performance of an entire asset class.
What is a multi market index?
These usually seek to represent multiple national markets in aggregate.
What are sector indexes?
pure sector index includes only stocks from a specific sector, such as energy, finance, or health care.
What are style indexes?
represent groups of securities classified according to market capitalization, value, growth, or a combination of these characteristics.
What are 2 style indexes based on size?
- small cap
- large cap
What are 2 style indexes based on investment style?
- value
- growth
What are 4 types of style index that use both size & style?
- Small-cap Value
- Small-cap Growth
- Large-cap Value
- Large-cap Growth
What are the 3 types of fixed income indexes?
- broad market indexes
- sector indexes (government, corporation, etc)
- style indexes (high yield)
What are the 3 types of alternative investments indexes? CRH
- commodity indexes
- R.E.I.T indexes
- hedge fund indexes
Commodity indexes don’t own real life, metals, energy, livestock, etc. So what do commodity indexes consist of?
consist of futures contracts on commodities
What is the formula for calculating the price return of an equal weighted index?
PR= 1/n * ((PR1) + (PR2) + (PR3)…)
What is the formula for calculating the price return of an price weighted index?
Price weighted index = (total of ending period of all stocks - total of beginning period of all stocks) / total of beginning period of al stocks
What is the difference between value investing, growth investing, and core investing?
Value: focuses on buying undervalued stocks or assets (assets trading below intrinsic or fundamental value)
Growth: focuses on buying stocks or assets with potential for above average growth in earnings or revenues
Core: balanced approach between both value and growth investing (diversified portfolio with mix of stability and growth potential)
What is float-adjusted market cap?
the weight of each constituent security is determined by adjusting market capitalization for its market float (market float refers to securities available to the market)
How do you calculate an updated divisor?
- add up total MV before splits
- divide MV by divisor to get index value
- add up total MV after splits
- divide by the index value to get new divisor
