Module 37.2: Uses and Types of Indexes Flashcards
What does rebalancing mean?
adjusting the weights of securities in a portfolio to their target weights after price changes have affected the weights.
What is index reconstitution? What happens when a price is added to the index?
refers to periodically adding and deleting securities that make up an index.
The price tends to rise as portfolio managers seeking to track that index in a portfolio buy the security.
What are the five main uses of security market indexes?
1) Reflection of market sentiment
2) Benchmark manager performance
3) Measure market return and risk
4) measure beta and risk-adjusted return
5) Model portfolio for index funds
What are the five types of equity market indexes?
1) Broad market index - contains 90% of market value
2) multi-market index - markets of several countries, used for geographic region purposes
3) multi market index with fundamental weighting - prevents a country with high returns from being outweighted
4) sector index - measures returns of an industry or sector.
5) style index - measures the returns to market cap and value or growth strategies.
What are types of fixed income indexes?
they can be constructed based on collateral, coupon, maturity, default risk, or inflation protection.
What are the two main issues with the construction of fixed income indexes?
1) large universe of securities - much broader than stocks, issued by governments . turnover is also higher given that fixed income matures unlike equity stocks
2) dealer markets and infrequent trading - fixed income primarily dealt by dealers so less liquid, meaning lack of information.
What are commodity indexes? What are the two main problems?
represent future contracts on commodities such as grain. livestock, metals, energy.
1) weighting method - different indexes have significantly different commodity exposure given the weighting method used.
2) futures vs. actuals - indexes are based on prices of futures and not the spot price.
What are real estate indexes?
constructed using returns based on appraisals of properties, repeat property sales, or the performance of REITS.
