Reading #47: Security Mrk Indices

Question 1

price index

Answer 1

uses only prices of constituent securities in return of calc.

Question 2

price-weighted index

Answer 2

average of prices of securities in index

Question 3

advantage of price-weighted index

Answer 3

simple to calculate

Question 4

disadvantage of price-weighted index

Answer 4

%chnge in higher priced stock has greater impact on index return. Also, stock splits will change weighting of index

Question 5

example of price-weighted index

Answer 5

Dow Jones Industrial Average (DJIA)

Question 6

equal weighted index definition

Answer 6

average return on stocks, equally weighted

Question 7

advantage of equal-weighted index

Answer 7

simple

Question 8

disadvantage of equal-weighted index

Answer 8

readjusted frequently with price changes so values are made equal each period

Question 9

market cap-weighted index

Answer 9

weights based on market cap of each index stock as proportion of total mkt cap.

Question 10

market float

Answer 10

total value of shares that actually available to investment public - controlling stockholder shares

Question 11

float-adj. mkt cap weight index

Answer 11

same as mkt cap-weighted but in proportion to shares avail. to investors

Question 12

ex. of mkt cap-weighted index

Answer 12

S&P500

Question 13

free float

Answer 13

market float that excludes shares not avail. to foreign buyers

Question 14

price-weighted index calculation

Answer 14

sum of stock prices/# of stocks in index adjusted for splits

Question 15

mkt cap-weighted calculation

Answer 15

(curr. total MV/base yr total MV)xBase year index value

Question 16

equal weighted calculation

Answer 16

average of the prices changes or returns of the stocks.

Question 17

reconstitution definition

Answer 17

periodically adding and deleting securities that make up an index

Question 18

commodity index definition

Answer 18

represents futures contracts on real commodities

Question 19

fixed income indices def

Answer 19

can be classified by isuser, collateral, coupon, maturity, risk, etc.

Question 20

fixed income indices disadvantage

Answer 20

FI security index universe if much broader than equity and have higher turnover - they vary widely in number of constituent securities and are therefore difficult to replicate

Question 21

What is a security market index?

Answer 21

“value of a given security market, market segment or asset class”

Question 22

how are security market indices managed?

Answer 22

like a portfolio of stocks

Question 23

what is the first decision in creating an index? a) target maket b) weighting method c) # of consituent securities

Answer 23

a) deciding the target market (because that determines the investment universe)

Question 24

when will the value of a price return and a total return index be the same (equal weighted) a) inception b) inception rebalance c) inception reconsitution

Answer 24

a) at inception

Question 25

what tends to have a value tilt? a) fundamental weighting b) equal weighting c) market cap weighting?

Answer 25

a) fundamental weighting

Question 26

fixed income index, compared to equity, are: a) more liquid b)easier to price c) drawn from a larger investment pool

Answer 26

c) drawn from a larger investment pool