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45 Security Market Indexes (How an Index is Constructed (Identify the…
45 Security Market Indexes
Definition about market indexes
performance of an asset class, security market, or segment of a market
Price index
Total return index
price appreciation plus interest, dividends, and other distributions
How an Index is Constructed
Identify the target market
Pick the
representative securities
from the market
Decide the
weight for every securities
Determine the rebalance frequency
Determine the time of securities re-examiniation
Use of Security-Market Indexes
Reflection of
investor confidence
Benchmark
of manager performance
Measure of market
return and risk
Measure of
beta
and
risk-adjusted
return
Model portfolio
for index funds
Weighting Schemes for Stock Indexes
Price-Weighted Index
an arithmetic average of current security prices
assumes you
purchase an equal number of shares
of each stock represented in the index
Equal-Weighted Index
average return of the index stocks for a given time period
arithmetic mean
geometric mean
Market Capitalization-Weighted Index
dividing its market capitalization by the total market capitalization of all the securities in the index
A Float-Adjusted Market Capitalization-Weighted Index
adjusting its market capitalization for the number of shares of the constituent security
Fundamental weighting
Weighting by
using measure of a company's size
that are independent of its security price to determine the weight on each constituent security.
Rebalancing and Reconstitution
Rebalancing
maintain the weight of each security
Reconstitution
periodically adding and deleting securities
Other Investment Indexes
Characteristics of Fixed-Income Indexes