Chapter 14 Flashcards
(116 cards)
1
Q
What is an investment index?
A
An investment index represents the relative changes in the share/stock prices of the constituent companies or stocks which make up the index.
2
Q
What is the general formula for weighted arithmetic indices?
A
I(t) = Σ (Pj * wj) / K
3
Q
What do the variables Pj, Pj0, and wi represent in the weighted arithmetic index formula?
A
- Pj: price of the jth constituent at time t
- Pj0: price of the jth constituent at time 0
- wi: weight applied to the jth constituent
4
Q
How are weights determined for investment indices?
A
The weights used are the market capitalisations of the constituents, usually at time 0.
5
Q
What is the purpose of the constant K in the index formula?
A
The constant K is fixed when the index is first set up, often to start at a round number like 100 or 1,000.
6
Q
What is ‘free float’ in the context of share indices?
A
The free float of a share is the proportion of shares that are freely available for purchase on the open market.
7
Q
What is chain-linking in investment indices?
A
Chain-linking is the process that ensures the index reflects the new market capitalisation of the constituents without being disturbed by changes in capital structure.
8
Q
True or False: Rights issues increase the index value.
A
False
9
Q
What is the formula for the investment index after allowing for chain-linking?
A
I(t) = Σ (Ni * Pj) / B(t)
10
Q
What is the ex-dividend (XD) adjustment?
A
The XD adjustment represents the amount of income that has been received since the start of the year by the capital value index.
11
Q
What is the purpose of a total return index?
A
A total return index combines capital appreciation and income received to provide a comprehensive measure of investment performance.
12
Q
How is the total return from time t-1 to time t calculated?
A
TRI(t) = TRI(t-1) * (I(t) - XD(t-1))
13
Q
What assumptions are made when calculating the total return index?
A
- Dividends are subject to the assumed rate of tax
- No expenses or losses incurred in reinvesting the dividends
14
Q
Fill in the blank: The formula to obtain a total return index at time t is TRI(t) = TRI(t - 1) + _______.
A
XD(t - 1)
15
Q
List three circumstances in which chain-linking would be required.
A
- Rights issues
- Stock splits
- Mergers and acquisitions
16
Q
What does the holding period return measure?
A
The holding period return measures the total return from holding an investment over a specified period.
17
Q
What is the relationship between market price, dividend, and total return?
A
Total return = (Market Price - Dividend) / Previous Market Price
18
Q
What must be considered when using published total return indices?
A
The tax and reinvestment assumptions used in the calculation of the index.
19
Q
True or False: Total return indices account for income received by the investor.
A
True
20
Q
What is the significance of the XD adjustment being reset to zero at the year end?
A
The XD adjustment reset allows for a new accumulation of dividends to be tracked for the next year.
21
Q
What is the effect of reinvesting dividends on total return?
A
Reinvesting dividends increases the number of shares held and thus the total return.
22
Q
What is the formula for the total return index (uscd)?
A
The formula is (Capital Gain + Income) / Starting Value
23
Q
Why is the XD adjustment often negligible?
A
Because of the small size of the XD adjustment relative to the capital index.
24
Q
What should be understood when using a published total return index?
A
The tax and reinvestment assumptions used in the calculation of the index.
25
How can net dividend yields be used in total return calculations?
Net dividend yields can estimate dividend income over a period to calculate total return.
26
What is an unweighted arithmetic index?
An unweighted arithmetic index is the arithmetic average of the relative price changes of the constituents.
27
Why are unweighted arithmetic indices unsuitable for performance measurement?
They are crude and generally inappropriate for performance measurement work.
28
What is a geometric index based on?
A geometric index is based on the geometric mean of the relative price changes of the constituents.
29
What is the main disadvantage of geometric indices?
If the price of one constituent falls to zero, then the entire index also falls to zero.
30
List some uses of indices.
* Measure of short-term market movements
* History of market movements and levels
* Tool for estimating future market movements
* Benchmark for assessing investment performance
* Valuing a notional portfolio
* Analyzing sub-sectors of the market
* Basis for index funds and derivative instruments
31
What is the FTSE 100 Index?
It consists of the 100 largest quoted companies by market capitalisation in the UK.
32
When was the FTSE 100 Index started, and what was its base value?
It started on 31 December 1983 with a base value of 1,000.
33
What does the FTSE 250 Index cover?
It covers the 250 companies ranking below the top 100 companies by market capitalisation.
34
What does the FTSE All-Share Index comprise?
It comprises the FTSE 350 Index and the SmallCap Index.
35
What is the Dow Jones Industrial Average?
It is an unweighted arithmetic index made up of 30 shares.
36
Why is the Dow Jones index considered crude?
* Based on only 30 shares
* No weighting by market value
37
What is the S&P 500?
A weighted arithmetic index representing 500 leading companies in the USA.
38
What does the NASDAQ Composite Index include?
It includes all common stocks traded on the NASDAQ market.
39
What is the Nikkei Stock Average 225?
An arithmetic index designed to reflect the overall market in Japan.
40
What is the main feature of the Topix index?
It comprises approximately 1,700 shares and is market capitalisation weighted.
41
What is the DAX?
The Deutsche Aktienindex, a real-time index of the German stock market.
42
What is the significance of free float in index calculations?
Free float reflects the proportion of a company's equity available for public trading.
43
Fill in the blank: An index that tracks the performance of a particular market is called an _______.
[index tracker fund]
44
True or False: The FTSE 350 Supersectors index combines the 100 and 250 indices.
True
45
What is the purpose of index tracker funds?
To replicate the performance of an investment index.
46
What is a potential risk when using indices compiled by commercial institutions?
Model risk due to indices not reflecting the broader market accurately.
47
What does Topix stand for?
Tokyo Stock Exchange First Section Index
## Footnote
Topix comprises approximately 1,700 shares and reflects 'free float' from June 2006.
48
How is the DAX classified?
It is a real-time index of thirty leading shares and a total return index
## Footnote
The DAX is the most widely quoted index in Germany.
49
What is the CAC General Index?
The main market index in France, comprising 250 shares
## Footnote
The CAC-40 consists of 40 of the largest stocks.
50
What are the two main uses of equity indices?
* Performance measurement
* Risk assessment
51
What does the Chicago Board Options Exchange Volatility index (VIX) measure?
The market perception of risk
## Footnote
The VIX is a weighted average of prices for options on the S&P 500 index.
52
What is the FTSE/JSE Africa Index Series?
A series of indices resulting from a joint venture between JSE Limited and FTSE
## Footnote
It replaced the JSE Actuaries indices on June 24, 2002.
53
What does the FTSE/JSE ALSI consist of?
99% of all listed companies
## Footnote
It is the All Share Index in South Africa.
54
What are style indices?
Indices that group companies by different rates of return
## Footnote
Examples include Value and Growth indices.
55
What is the FTSE Global Equity Index Series?
A series covering over 8,000 securities in 48 countries
## Footnote
It captures around 98% of the world’s equity markets.
56
What is the MSCI ACWI?
All Country World Index, measuring equity market performance of developed and emerging markets
## Footnote
As of May 2015, it consisted of 46 country indices.
57
What types of indices does the FTSE Gilts Index Series cover?
* Conventional gilts
* Index-linked gilts
58
What happens to the FTSE Gilt Index Series figures when a gilt goes ex-dividend?
The price index, accrued interest index, and ex-dividend adjustment are affected
## Footnote
The index numbers are calculated using dirty prices.
59
What are the main features of the FTSE Global Government Bond indices?
They cover central government debt from 22 countries
## Footnote
Sub-indices are segmented by maturity band.
60
What is the Markit iTraxx Europe index?
An index consisting of the top 125 names in terms of CDS volume traded
## Footnote
It is quoted for various maturity CDS.
61
What is a CDS?
A credit derivative used to manage credit risk
## Footnote
A CDS index is a standardized credit security that may be more liquid.
62
Fill in the blank: The FTSE Global Equity Index Series is designed to overcome issues of indices being insufficiently _______.
comprehensive
63
True or False: Stocks not available to foreign investors are included in the FTSE Global Equity indices.
False
64
What are the components of the FTSE/JSE Africa Headline Indices?
* FTSE/JSE ALSI
* TOP40
* Mid-cap index
* Small cap index
* Fledgling Index
65
What is the purpose of volatility indices?
To measure the volatility of equities as an indication of market risk perception
66
What is the main difference between total return indices and price indices?
Total return indices account for dividends, while price indices do not
67
What does the FTSE Corporate Bond indices cover?
Investment grade bonds from corporate entities
## Footnote
Sub-indices are available by maturity band and credit rating.
68
What is the role of accrued interest in the FTSE Gilt Index Series?
To adjust for gross income on the index for the calendar year to date
69
What is the process of changing the constituents of an index known as?
Rolling the index
70
What is the main fixed-interest bond index in South Africa?
ALBI (All Bond Index)
71
What are the two sub-indices of the ALBI?
* GOVI (Government Bond Index)
* OTHI (Other Bond Index)
72
How often are the constituents and weightings of the ALBI changed?
Constituent changes are effected quarterly and bond weightings change monthly.
73
What is the main inflation-linked bond index in South Africa?
CIU (Composite Inflation-Linked Index)
74
What are the three sub-indices of the CIU?
* IGOV (Government Bonds)
* ISOE (State Owned Enterprises)
* ICORP (Corporate Bonds)
75
What type of index is the Short Term Fixed Interest (STeFI) Composite index?
A benchmark index for cash equivalent investments in South Africa.
76
What constitutes the STeFI Composite index?
* 15% STeFI Call Deposit Index
* 30% STeFI 3 month NCD Index
* 35% STeFI 6 month NCD Index
* 20% STeFI 12 month NCD Index
77
What are the two key problems in constructing property indices?
* Lack of reliable and up-to-date data on property prices
* Heterogeneity of properties
78
What is a significant challenge in obtaining reliable property price data?
Each property is unique and its market value is only known when it changes hands.
79
What are the two main types of investment property indices?
* Portfolio-based indices
* Barometer indices
80
What do portfolio-based indices measure?
Rental values, capital values, or total returns of actual rented properties.
81
What is the main use of barometer indices?
To track movements in the property market at large.
82
What is a property derivative?
A financial derivative whose value is based on the value of an underlying property.
83
What is the main weakness of a barometer index?
It is unsuitable for portfolio performance measurement.
84
What do equity indices measure?
Relative changes in the share prices of constituent companies.
85
What is the formula for a weighted arithmetic average index?
I(t) = K
86
What is the general use of indices?
* Measure short-term market movements
* Estimate future market movements
* Benchmark for investment performance
* Analyze sub-sectors of the market
* Basis for index funds and derivative instruments
87
What is the FTSE 100 index based on?
The 100 largest companies in the UK equity market.
88
What does the CAC General index represent?
The main index in France.
89
What is the main equity index in South Africa?
FTSE/JSE Africa Headline Indices
90
What do volatility indices measure?
The volatility of equities, indicating market perception of risk.
91
What is the significance of the FTSE Global Equity Index Series?
It covers over 98% of the world’s equity markets in terms of investible market capitalisation.
92
What is the purpose of volatility indices?
To measure the volatility of equities and indicate market perception of risk.
93
What does the FTSE Global Equity Index Series cover?
Over 98% of the world’s equity markets in terms of investable market capitalisation.
94
How are the FTSE indices weighted?
They are weighted arithmetic indices based on market capitalisations and reflect free float weightings.
95
What does the FTSE All-World Index cover?
2,700 stocks from the Global Equity Series.
96
What are the Morgan Stanley Capital International Indices?
A widely used series of international equity indices covering both developed and emerging markets.
97
What types of indices are included in the FTSE Gilts Index Series?
Price and yield indices for conventional and index-linked gilts.
98
What factors are included in the price indices of the FTSE Gilts Index Series?
* Index number
* Accrued interest
* XD adjustment for the calendar year to date.
99
What are the main international bond indices mentioned?
* FTSE global bond index series
* Markit iBoxx fixed income indices.
100
What is the ALBI in South Africa?
All Bond Index, a composite index containing the top 20 fixed interest bonds ranked by liquidity and market capitalisation.
101
What are the two sub-indices of the ALBI?
* GOVI (Government Bond Index)
* OTHI (Other Bond Index).
102
What does the Short Term Fixed Interest (STeFI) Composite index measure?
It is a benchmark index for money market instruments in South Africa.
103
What are credit derivative indices used for?
They allow investors access to standardised credit default contracts on various securities.
104
What challenges are associated with property price indices?
* Little reliable, up-to-date price data
* Properties are heterogeneous.
105
What do portfolio-based property indices measure?
Rental values, capital values, or total returns of actual rented properties.
106
Who is a leading provider of commercial property indices?
IPD.
107
What is the formula used to estimate the total return for an investment market?
TR = (I(t+1) - I(t) + XD(t+1) - XD(t)) / I(t).
108
When is chain-linking required in index calculations?
* Rights issues
* Share buy-backs
* New share issues
* Mergers and takeovers.
109
What are the two main components of total return from an investment?
* Capital gain
* Income received.
110
What is the significance of the ex-dividend date for indices?
The price index may fall to reflect the drop in dirty price of a constituent.
111
What are the ten economic groups in the FTSE classification system?
* Oil and gas
* Basic materials
* Industrials
* Consumer goods
* Health care
* Consumer services
* Telecommunications
* Utilities
* Financials
* Technology.
112
What is the difference between the DAX and FTSE All-Share index?
The DAX is a total return index, including income, while FTSE All-Share is just a capital value index.
113
What is the usual assumption for calculating index performance?
Using the ex-dividend date.
114
What is the main weakness of a barometer property index?
It relies on subjective estimates for hypothetical properties.
115
What is the expected behavior of the arithmetic index compared to the geometric index?
The arithmetic index rises faster than the geometric index.
116
What factors could cause yields on other fixed interest investments to be higher than government bonds?
* Higher level of default risk
* Lower level of marketability.
