Reading #47: Security Mrk Indices Flashcards
price index
uses only prices of constituent securities in return of calc.
price-weighted index
average of prices of securities in index
advantage of price-weighted index
simple to calculate
disadvantage of price-weighted index
%chnge in higher priced stock has greater impact on index return. Also, stock splits will change weighting of index
example of price-weighted index
Dow Jones Industrial Average (DJIA)
equal weighted index definition
average return on stocks, equally weighted
advantage of equal-weighted index
simple
disadvantage of equal-weighted index
readjusted frequently with price changes so values are made equal each period
market cap-weighted index
weights based on market cap of each index stock as proportion of total mkt cap.
market float
total value of shares that actually available to investment public - controlling stockholder shares
float-adj. mkt cap weight index
same as mkt cap-weighted but in proportion to shares avail. to investors
ex. of mkt cap-weighted index
S&P500
free float
market float that excludes shares not avail. to foreign buyers
price-weighted index calculation
sum of stock prices/# of stocks in index adjusted for splits
mkt cap-weighted calculation
(curr. total MV/base yr total MV)xBase year index value
equal weighted calculation
average of the prices changes or returns of the stocks.
reconstitution definition
periodically adding and deleting securities that make up an index
commodity index definition
represents futures contracts on real commodities
fixed income indices def
can be classified by isuser, collateral, coupon, maturity, risk, etc.
fixed income indices disadvantage
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
What is a security market index?
“value of a given security market, market segment or asset class”
how are security market indices managed?
like a portfolio of stocks
what is the first decision in creating an index? a) target maket b) weighting method c) # of consituent securities
a) deciding the target market (because that determines the investment universe)
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
a) at inception
what tends to have a value tilt? a) fundamental weighting b) equal weighting c) market cap weighting?
a) fundamental weighting
fixed income index, compared to equity, are: a) more liquid b)easier to price c) drawn from a larger investment pool
c) drawn from a larger investment pool
