practical investment management by robert.a.strong slides ch13

8/14/2019 Practical Investment Management by Robert.A.Strong slides ch13

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MARKET INDEXESCHAPTER THIRTEEN

Practical Investment Management

Robert A. Strong


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South-Western / Thomson Learning 2004 13 - 2

Outline

Introduction Index Construction

Price Weighting

Equal Weighting Capitalization Weighting

Popular Indexes Stock Indexes

Fixed Income Indexes

International Indexes


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Introduction

Indexes are indicators of the days marketactivity.

They help us interpret investment results

and provide a benchmark for performance

measurement.

They are also useful in financial research

when an investigator seeks to discover the

relationship between certain economicvariables and market results.


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Index Construction: Price Weighting

Aprice-weightedindex is composed

of a single share of each of theindex components, regardless of the

price of the share or the size of the

underlying company.

For example, the shares of 30 industrial

companies make up the Dow Jones Industrial

Average (DJIA).

To account for artificial price changes due to

stock splits, an index divisoris made

use of.


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Index Construction: Price Weighting

Insert Table 13-2 here.


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Index Construction: Equal Weighting

An equal-weightedindex reflects theperformance associated with the

selection of a particular security by

chance. It is measured by price

change rather than by price alone.

Theoretically, equal weighting is preferable to

price weighting.


7/19South-Western / Thomson Learning 2004 13 - 7

Index Construction: Equal Weighting




Index Construction: Capitalization Weighting

In capitalization weighting, also

called value weighting, the share

price is multiplied by the number of

outstanding shares.

The total is then compared to some arbitrary

starting value (base value).




Table 13-4 DO THIS IN TWO SLIDES



Popular Indexes: Stock Indexes

The four primary averages are the industrial

average (30 large blue chip companies), the

transportation average (20 transportationcompanies), the utilities average (15 public

utility stocks), and the Dow Jones composite

(all the 65 stocks in the DJIA, DJTA, and

DJUA). Price-weighted.

Dow Jones Averages




Insert Figure 13-1 here.




The main indexes are the S&P 500 Composite

(500 NYSE-traded securities), S&P Mid Cap 400

(400 mid-capitalization securities), S&P Small

Cap 600(600 small-cap stocks), and the S&PSuper Composite 1500(500 + 400 + 600).

Value-weighted.

Note that a divisor is still necessary because offirm replacements, issuance of additional

shares, and share repurchases.

Standard & Poors Indexes




Insert Figure 13-2 here.


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The NYSE Composite is an average of all the

stocks listed on the New York Stock Exchange.

The Russell 3000 indexis a mixture of bothlarge- and small-capitalization stocks and, to

many portfolio managers, a better

representation of the broad market.

Others


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Popular Indexes: Fixed Income Indexes

More than 400 indexes measure fixed incomesecurities.

Examples include :

- Dow Jones 20 Bond Index- S&P Municipal Bond Index

- S&P U.S. Government Bond Index

- Salomon Smith Barney Corporate Bond

Index


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Popular Indexes: International Indexes

European indexes

- United Kingdom: FT-SE 100

- Germany: DAX 30

-France: CAC-40

-Italy: MIB 30 Asia and the Pacific Rim

- Japan: Nikkei 225, TOPIX, Nikkei 300

- Australia:All Ordinaries- Hong Kong: Hang Seng


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practical investment management by robert.a.strong slides ch13

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