Security Market Index Flashcards
What is a security market index?
It consists of individual securities that represent a given security market, market segments, or asset class.
What are the 2 versions of a security market index?
- Price return index: it only reflects the prices of constituent securities.
- Total return index: not only reflects prices but also assumes reinvestment of all income received since inception.
What is the price return and total return of an index?
- Price return: it measures only the percentage change in price.
- Total return measures the percentage change in price plus interest, dividends, and other distributions.
What are the elements of an index construction and management?
- Target market selection
- Security selection
- Index weighting
- Rebalancing
- Reconstitution
On what should the target market be based on?
- Asset class
- Geographic region
- The exchange on which the securities are traded
- Other characteristics
Why does the divisor of a price-weighted index must be adjusted?
To prevent stock splits and stock dividends from changing the value of the index.
What is the rebalancing of an index?
Rebalancing may be necessary to adapt to the changes in the market.
In equal-weighted indices, wights of securities that have witnessed price appreciation increase over time, and weights, of securities that have underperformed decrease over time.
What is reconstitution, and why is it used?
It refers to the process of changing securities in an index.
It is performed to reflect changes in the target market due to Chapter 7, de-listings, mergers, etc. It is also performed to reflect the judgment of the selection committee.
What is a broad market index?
It contains securities representing more than 0-% of the selected market.
What is a multi-market index?
It consists of security market indices from different countries and may represent multiple national markets, geographic regions, economic development groups, or even the entire world.
What is a sector index?
It only includes securities representing a particular economic sector where the economic sector may be classified on a national, regional, or global basis.
Why are style indexes used?
- Used to gauge market sentiment.
- Used as proxies for measuring and modeling returns, systematic risk, and risk-adjusted performance.
- Act as proxies for asset classes in asset allocation models.
- Used as benchmarks for actively managed portfolios.
- Serve as the basis for the creation of numerous investment products.
By which characteristics can fixed-income can be categorized?
- Type of issuer
- Type of Financing
- Currency of payments
- Maturity
- Credit quality
- Absence or presence of inflation protection.
What are the characteristics of a commodity index?
They consist of futures contracts and have these characteristics:
- They don’t have an obvious weighting method, so index providers create their own weighting methods.
- Different weighting methods lead to different exposures to specific commodities which lead to different risk and return profiles of commodity indices.
- The performance of commodity indices may differ from that of the underlying commodities.
What are real estate investment trust indices?
They represent the market for real estate and real estate securities.
What is the formula for the value of a price return index?
What is the formula for the total return of an index?
What is the formula of equal weighting?
