practical investment management by robert.a.strong slides ch13
TRANSCRIPT
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MARKET INDEXESCHAPTER THIRTEEN
Practical Investment Management
Robert A. Strong
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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.
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Index Construction: Equal Weighting
Insert Table 13-3 here.
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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).
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Index Construction: Capitalization Weighting
Table 13-4 DO THIS IN TWO SLIDES
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Index Construction: Capitalization Weighting
Table 13-4 DO THIS IN TWO SLIDES
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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
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Popular Indexes: Stock Indexes
Insert Figure 13-1 here.
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Popular Indexes: Stock Indexes
Insert Table 13-7 here.
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Popular Indexes: Stock Indexes
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
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Popular Indexes: Stock Indexes
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Popular Indexes: Stock Indexes
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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