Indices

Question 1

what is the intent of an index

Answer 1

reflects the performance of an entire market of assets

Question 2

can you invest in an index

Answer 2

no it is not an investment product

Question 3

how to invest in an index

Answer 3

invest in a fund that tracks an index

Question 4

what is index tracking

Answer 4

investing in the companies in the index at the weights they are in the index

Question 5

what decisions need to be made when construction an index

Answer 5

• Which target market should the index represent? eg what country, emerging markets
• How many companies to include from that market
• how much weight should be allocated to each company
• how often should the index be rebalanced (quarterly, annually, semi annually etc)
• how to decide what should go in or not when others fall out

Question 6

what are some examples of different weighting methods used in index construction

Answer 6

• equally weighted
• fundamentally weighted (eg by number of employees (something other than price))
• price weighted
• market capitalisation (largest companies)

Question 7

when are market indices used

Answer 7

• gauges of collective opinion of the market
• proxy for modelling and measuring returns
• proxy for asset class allocation models
• benchmarks for actively managed portfolios (absolute and relative risk of return)

Question 8

example of a broad market index

Answer 8

Wilshire 5000

reflect US publicly traded equities

Question 9

example of multimarket index

Answer 9

MSCI Emerging Markets

Question 10

example of sector index

Answer 10

GSTI Semiconductor index

Question 11

example of style index

Answer 11

Dow Jones US Small-Cap value index

(smaller companies as historically they tend to outperform larger ones)

Question 12

does what happens in the country level equity market reflect the real economy?

Answer 12

no

with globalisation many companies may have locations all over the world, but earnings are only recorded in the country of domicile

Question 13

is the ISEQ a good representation of the irish economy

Answer 13

no because it just includes irish companies and not our strong economic activities

eg many of the bigger companies here in ireland would be listed on the LSE

Question 14

why is the GDP per capita very low in Ireland

Answer 14

large amount of economic activity here is from MNCs and profits get returned to the HQs in other countries

Question 15

what should be used to measure GDP in ireland instead

Answer 15

GNP

Question 16

what are EFTs

Answer 16

Exchange Traded Funds

offer the benefits of traditional passive funds without the fees of the professional money manager

Question 17

what is the challenge in tracking major indices

Answer 17

minimise tracking error

Question 18

why do most passive investors choose to invest in index tracking funds

Answer 18

no decisions to be made about allocation to individual companies, industries or regions

Question 19

what is the problem with investing in index tracking funds

Answer 19

invested in some companies by default

no analysis on companies ESG scores

little engagement with companies

Question 20

what is the issue with Blackrock and engagement

Answer 20

Blackrock holds a significant amount of shares in many of the worlds leading companies

so much so that they could sway a vote in an AGM

but then again, it is their clients who hold these shares ultimately

and they are tracking an index so they cannot divest

Question 21

what do bond indices try to do

Answer 21

represent sectors of the bond market

(stratify rather than replicate)

they cannot replicate the, as only few of each bond are issued

Question 22

when making bond indices, investors will try to find bonds with similar:

Answer 22

• issuers (company or government)
  same industries
• type of market (developed or emerging)
• credit qualify and investment grade
• maturity dates

Question 23

challenge facing bond indices construction that are irrelevant for equity index constrcution

Answer 23

illiquidity
lack of pricing data
number of outstanding securities

Question 24

are hedge funds regulated

Answer 24

no

Question 25

are hedge funds liquid

Answer 25

no

Question 26

who invests in hedge funds

Answer 26

people who can afford to lose it

this is because of large minimum investments and high management fees

Question 27

average of hedge fund minimum investment

Answer 27

$1 million

Question 28

why is there a lot of risk typically with hedge funds

Answer 28

use of leverage
extensive use of derivatives