Security Market Index Flashcards

1
Q

What is a security market index?

A

It consists of individual securities that represent a given security market, market segments, or asset class.

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2
Q

What are the 2 versions of a security market index?

A
  • Price return index: it only reflects the prices of constituent securities.
  • Total return index: not only reflects prices but also assumes reinvestment of all income received since inception.
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3
Q

What is the price return and total return of an index?

A
  • Price return: it measures only the percentage change in price.
  • Total return measures the percentage change in price plus interest, dividends, and other distributions.
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4
Q

What are the elements of an index construction and management?

A
  • Target market selection
  • Security selection
  • Index weighting
  • Rebalancing
  • Reconstitution
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5
Q

On what should the target market be based on?

A
  • Asset class
  • Geographic region
  • The exchange on which the securities are traded
  • Other characteristics
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6
Q

Why does the divisor of a price-weighted index must be adjusted?

A

To prevent stock splits and stock dividends from changing the value of the index.

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7
Q

What is the rebalancing of an index?

A

Rebalancing may be necessary to adapt to the changes in the market.
In equal-weighted indices, wights of securities that have witnessed price appreciation increase over time, and weights, of securities that have underperformed decrease over time.

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8
Q

What is reconstitution, and why is it used?

A

It refers to the process of changing securities in an index.
It is performed to reflect changes in the target market due to Chapter 7, de-listings, mergers, etc. It is also performed to reflect the judgment of the selection committee.

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9
Q

What is a broad market index?

A

It contains securities representing more than 0-% of the selected market.

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10
Q

What is a multi-market index?

A

It consists of security market indices from different countries and may represent multiple national markets, geographic regions, economic development groups, or even the entire world.

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11
Q

What is a sector index?

A

It only includes securities representing a particular economic sector where the economic sector may be classified on a national, regional, or global basis.

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12
Q

Why are style indexes used?

A
  • Used to gauge market sentiment.
  • Used as proxies for measuring and modeling returns, systematic risk, and risk-adjusted performance.
  • Act as proxies for asset classes in asset allocation models.
  • Used as benchmarks for actively managed portfolios.
  • Serve as the basis for the creation of numerous investment products.
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13
Q

By which characteristics can fixed-income can be categorized?

A
  • Type of issuer
  • Type of Financing
  • Currency of payments
  • Maturity
  • Credit quality
  • Absence or presence of inflation protection.
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14
Q

What are the characteristics of a commodity index?

A

They consist of futures contracts and have these characteristics:
- They don’t have an obvious weighting method, so index providers create their own weighting methods.
- Different weighting methods lead to different exposures to specific commodities which lead to different risk and return profiles of commodity indices.
- The performance of commodity indices may differ from that of the underlying commodities.

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15
Q

What are real estate investment trust indices?

A

They represent the market for real estate and real estate securities.

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16
Q

What are hedge fund indices?

A

They are designed to represent the performance of hedge funds on a very broad, global level or strategy level.

17
Q

What is the formula for the value of a price return index?

A
18
Q

What is the formula for the total return of an index?

A
19
Q

What is the formula of equal weighting?

A