Security Market Indexes Flashcards
What is a security market index?
It represents a given security market, market segment, or asset class. Most indexes are constructed as portfolios of marketable securities.
The value of an index is calculated on a regular basis using either the actual or estimated market prices of the individual securities, known as constituent securities, within the index.
Constructing and managing a security market index is similar to constructing and managing a portfolio of securities.
What is the first decision for index construction?
Identifying the target market, market segment, or asset class that the index is intended to represent. That can be based on asset class, geographic region, certain exchanges, and/or other characteristics.
The weighting decision determines how much of each security to include in the index and has a substantial impact on an index’s value.
What are four weighting methods for an index?
Price weighting
Equally weighted
Market-cap weighted
Fundamentally weighted
What is price weighting?
The weight on each constituent security is determined by dividing its price by the sum of all the prices of the constituent securities.
How to work with a stock split in a price-weighted index?
Adjust the divisor
What is equal weighting?
Each security gets the same weight.
What is market-capitalization weighting or value-weighting?
Weight on each security is determined by dividing its market cap by the total market cap.
What is float-adjusted market-capitalization weighting?
The weight on each constituent security is determined by adjusting its market cap for its market float. Typically, market float is the number of shares of the security that are available to the investing public.
What is fundamental weighting?
Using measures of a company’s size that are independent of its security price to determine the weight on each constituent security.
What is index rebalancing?
Adjusting the weights of the constituent securities in the index. To maintain the weight of each security consistent with the index’s weighting method, the index provider rebalances the index by adjusting the weights of the securities on a regular basis.
What is index reconstitution?
Reconstitution is the process of changing the constituent securities in an index. It is similar to a portfolio manager deciding to change the securities in his portfolio.
What are four types of equity indexes?
Broad market
Multi-market
Sector
Style
What are the Shanghai Stock Exchange Composite Index (SSE), Wilshire 500 and Russell 3000?
Broad market indexes
What are multi-market indexes?
They comprise indexes from different countries and regions and are designed to represent multiple security markets
What are emerging and frontier markets?
Emerging markets are growing and frontier markets are smaller and less developed
What are challenges of constructing a fixed-income index?
The fixed-income universe includes securities issued by governments, government agencies and corporations. Therefore, there are much more fixed-income securities than equity securities.
Also, fixed-income securities mature and need to be turned over in the indexes.
Furthermore, fixed-income markets are predominantly dealer markets. This makes them illiquid.
What are types of fixed-income securities?
Type of issuer
Type of financing
Currency of payments
Maturity
Credit quality
Absence or presence of inflation protection
Most bond indexes rely on dealer prices!
What are the three most common alternative investment indexes?
Real estate, commodities and hedge funds
What are commodity indexes?
They consist of futures contracts on one or more commodities, such as agricultural products (rice, wheat, sugar), livestock (cattle, hogs), precious and common metals (gold, silver, copper), and energy commodities (crude oil, natural gas).
Each commodity index uses a different weighting method.
