Los 40.g

Question 2

What is the use of a security market index?

Answer 2

1. Reflection of market sentiment
2. Benchmark of manager performance (only when it matches the Managers investment approach e.g. a value manager should be compared against a value index)
3. Measure of market return and risk
4. Measure of beta and risk-adjuste return - using CAPM to determine an expected return
5. Model Portfolio for index funds

Question 3

What are types of Equity Indexes?

Answer 3

• Broad market = usually 90% of the markets total value
• Multi-market = Indexes of markets in several countries to look at regions
• Multi-market with fundamental weighting = uses market capitalization for the country indexes - uses fundamental weighting for global index (e.g. GDP)
• Sector index
• Style index = e.g. mid cap value, high cap growth etc