CHAPTER
4
Security Market Indexes
and Index Funds
After you read this chapter, you should be able to answer the following questions:
Copyright © 2018. Cengage. All rights reserved.
What are some major uses of security market indexes?
What major characteristics cause alternative indexes to differ?
What are the major stock market indexes in the United States and globally, and what are their characteristics?
Why are bond indexes more difficult to create and maintain than stock indexes?
What are the major bond market indexes for the United States and the world?
What are some of the composite stock–bond market indexes?
Where can you get historical and current data for all these indexes?
What is the relationship among many of these indexes during short run periods (monthly)?
How can security market indexes be used to create investment portfolios and benchmark performance?
What is the difference between an index mutual fund and an exchange-traded fund?
A fair statement regarding security market indexes—especially those outside the
United States—is that everybody talks about them but few people understand them.
Even those investors familiar with widely publicized stock market series, such as the
Dow Jones Industrial Average (DJIA) or the S&P 500 Index, usually know little
about indexes for the U.S. bond market or for non-U.S. stock markets such as Tokyo or
London.
Although portfolios contain many different individual stocks, investors typically ask, “What happened to the market today?” The reason for this question
is that if an investor owns more than a few stocks or bonds, it is cumbersome
to follow each stock or bond individually to determine the composite performance of the portfolio. Also, there is an intuitive notion that most individual
stocks or bonds move with the aggregate market. Therefore, if the overall market
rose, an individual’s portfolio probably also increased in value. To supply investors with a composite report on market performance, some financial publications
or investment firms have created and maintain stock market and bond market
indexes.
Initially in this chapter we discuss several important uses of security market indexes
that provide an incentive for becoming familiar with these indexes. We also consider
what characteristics cause various indexes to differ and why one index might be preferable for a given task given its characteristics. Subsequently we present the most well
known U.S. and global stock market indexes. Then we consider bond market indexes
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95
96
Part 1: The Investment Background
that are important because the bond market continues to grow in size and importance,
followed by consideration of composite stock market -bond market series. We conclude this presentation with an examination of the relationship among indexes and
what factors impact high or low correlations.
With this background regarding indexes we transition to consider one of the
fastest growing components in investments—passive investing. We consider the
specific difference between active and passive management; why passive management has experienced significant growth, how to construct a passive index portfolio and how to evaluate the performance of a passive portfolio by measuring its
tracking error.
Copyright © 2018. Cengage. All rights reserved.
4.1 USES
OF SECURITY MARKET INDEXES
Security market indexes have at least five significant uses. A primary application is to use
the index values to compute total returns and risk measures for an aggregate market or
some component of a market over a specified time period. In turn, many investors use the
computed return-risk results as a benchmark to judge the performance of individual portfolios. A basic assumption when evaluating portfolio performance is that any investor should
be able to experience a risk-adjusted rate of return comparable to the market by randomly
selecting a large number of stocks or bonds from the total market; hence, a superior portfolio manager should consistently do better than the market. Therefore, an aggregate stock or
bond market index can be used as a benchmark to judge the performance of professional
money managers.
An obvious use of indexes is to create an index portfolio. As we have discussed, it is
difficult for most money managers to consistently outperform specified market indexes
on a risk-adjusted basis over time.1 Therefore, an obvious alternative is to invest in a portfolio that will emulate this market portfolio. This notion led to the creation of index
funds and exchange-traded funds (ETFs) that would track the performance of the specified
market series (index) over time. The original index funds were common-stock funds as
discussed in Malkiel (2015) and Mossavar-Rahmani (2005). The development of comprehensive, well-specified bond market indexes and the inability of most bond portfolio managers to outperform these indexes have led to similar bond index funds, as noted by
Hawthorne (1986). Securities analysts, portfolio managers, and academicians use security
market indexes as proxies for the aggregate stock or bond market to examine the factors
that influence aggregate security price movements and to compare the risk-adjusted performance of alternative asset classes (e.g., stocks vs. bonds vs. real estate). In addition,
they examine the relative performance within asset classes such as large-cap stocks versus
small-cap stocks.
“Technicians” are also interested in an aggregate market index because they believe
past price changes can be used to predict future price movements. For example, to project future stock price movements, technicians would plot and analyze price and volume
changes for a stock market series like the Dow Jones Industrial Average or the S&P 500
Index.
Finally, work in portfolio and capital market theory has implied that the relevant risk for an
individual risky asset is its systematic risk, which is the relationship between the rates of return
1
Throughout this chapter and the book, we will use indicator series and indexes interchangeably, although indicator
series is the more correct specification because it refers to a broad class of series; one popular type of series is an
index, but there can be other types and many different indexes.
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Chapter 4: Security Market Indexes and Index Funds
97
for a risky asset and the rates of return for a market portfolio of risky assets.2 Therefore, an
aggregate market index is used as a proxy for the market portfolio of risky assets.
4.2 DIFFERENTIATING FACTORS
MARKET INDEXES
IN
CONSTRUCTING
Because the indexes are intended to reflect the overall movements of a group of securities, we
need to consider three factors that are important when constructing an index intended to represent a total population.
4.2.1 The Sample
The first factor is the sample used to construct an index. The size, the breadth, and the source
of the sample are all important.
A small percentage of the total population will provide valid indications of the behavior of
the total population if the sample is properly selected. In some cases, because of the economics
of computers, virtually all the stocks on an exchange or market are included, with a few deletions of unusual securities. Where you do not include the total population, the sample should
be representative of the total population; otherwise, its size will be meaningless. A large biased
sample is no better than a small biased sample. The sample can be generated by completely
random selection or by a nonrandom selection technique designed to incorporate the important characteristics of the desired population. Finally, the source of the sample is important if
there are any differences between segments of the population, in which case samples from each
segment are required.
4.2.2 Weighting Sample Members
The second factor is the weight given to each member in the sample. Four principal weighting
schemes are used for security market indexes: (1) a price-weighted index, (2) a market-value
weighted index, (3) an unweighted index, or what would be described as an equal-weighted
index, and (4) a fundamental weighted index based on some operating variable like sales, earnings, or return on equity. We will discuss examples for each of these.
Copyright © 2018. Cengage. All rights reserved.
4.2.3 Computational Procedure
The final consideration is the computational procedure used. One alternative is to take a
simple arithmetic mean of the various members in the index. Another is to compute an
index and have all changes, whether in price or value, reported in terms of the basic
index. Finally, some prefer using a geometric mean of the components rather than an
arithmetic mean.
4.3 STOCK MARKET INDEXES
As mentioned previously, we hear a lot about what happens to the Dow Jones Industrial
Average (DJIA) each day. You might also hear about other stock indexes, such as the S&P
500 Index, the NASDAQ composite, or even the Nikkei Average of Japanese stocks. If you
listen carefully, you will realize that these indexes experience different percentage changes
2
This concept and its justification are discussed in Chapters 6, 7, and 11. Subsequently, in Chapter 18, we consider
the difficulty of finding an index that is an appropriate proxy for the theoretical market portfolio of risky assets.
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98
Part 1: The Investment Background
(which is the way that the changes should be reported). Reasons for some differences in performance are obvious, such as the DJIA versus the Nikkei Average, but others are not. In this
section, we briefly review how the major series differ in terms of the characteristics discussed
in the prior section. This will help you understand why the alternative stock indexes should
differ.
The discussion of the indexes is organized by the weighting of the sample of stocks.
We begin with the price-weighted index because some of the most popular indexes are in
this category. The next group is the widely used value-weighted indexes followed by the
unweighted indexes, and finally the fundamental indexes.
4.3.1 Price-Weighted Index
A price-weighted index is an arithmetic mean of current stock prices, which means that index
movements are influenced by the differential prices of the components.
Dow Jones Industrial Average The best-known price-weighted index is also the oldest and
certainly the most popular stock market index, the Dow Jones Industrial Average (DJIA). The
DJIA is a price-weighted average of 30 large, well-known industrial stocks that are generally
the leaders in their industry (blue chips). The DJIA is computed by totaling the current prices
of the 30 stocks and dividing the sum by a divisor that has been adjusted to take account of
stock splits and other investments (mainly changes in the sample over time).3 The divisor is
adjusted so the index value will be the same before and after the split or other changes. An
adjustment of the divisor is demonstrated in Exhibit 4.1. The equation for the index is:
DJIAt
30
i 1
Pit
Dadj
where:
DJIAt
Pit
Dadj
value of the DJIA on day t
closing price of stock i on day t
adjusted divisor on day t
Copyright © 2018. Cengage. All rights reserved.
In Exhibit 4.1, we employ three stocks to demonstrate the procedure used to derive a new
divisor for the DJIA when a stock splits. When stocks split, the divisor becomes smaller, as
shown. The cumulative effect of splits and other changes can be derived from the changes in
the divisor that was originally 30.0, but as of June 29, 2017, it was 0.14602128057775.
E xh ib it 4 .1 Example of Change in DJIA Divisor When a Sample Stock Splits
Stock
Before Split
After Three-for-One
Split by Stock A
A
B
C
Prices
30
20
10
Prices
10
20
10
60
3
20
40
X
20
X 2
(New Divisor)
3
A complete list of all events that have caused a change in the divisor since the DJIA went to 30 stocks on October 1,
1928, is contained in Phyllis S. Pierce, ed., The Business One Irwin Investor’s Handbook (Burr Ridge, IL: Dow Jones
Books, annual).
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Chapter 4: Security Market Indexes and Index Funds
99
E xh ib it 4 .2 Demonstration of the Impact of Differently Priced Shares on
a Price-Weighted Index
PERIOD T + 1
Copyright © 2018. Cengage. All rights reserved.
Stock
Period T
Case A
Case B
A
B
C
100
50
30
110
50
30
100
50
33
Sum
Divisor
Average
Percentage change
180
3
60
190
3
63.3
5.5
183
3
61
1.7
The adjusted divisor ensures that the new value for the index is the same as it would have
been without the split or other change. In this example, the presplit index value was 20. Therefore, after the split, given the new sum of prices, the divisor is adjusted downward from 3 to 2
to maintain this value of 20. The divisor is also changed when there is a change in the sample
makeup of the index.
Because the index is price weighted, a high-priced stock carries more weight than a lowpriced stock. As shown in Exhibit 4.2, a 10 percent change in a $100 stock ($10) will cause a
larger change in the index than a 10 percent change in a $30 stock ($3). For Case A, when the
$100 stock increases by 10 percent, the average rises by 5.5 percent. For Case B, when the $30
stock increases by 10 percent, the average rises by only 1.7 percent.
The DJIA has been criticized on several counts. First, the sample used for the index is limited to 30 nonrandomly selected large, mature blue-chip stocks that cannot be representative
of the thousands of U.S. stocks. As a result, the DJIA has not been as volatile as other stock
market indexes, and its long-run returns are not comparable to other NYSE stock indexes.
In addition, because the DJIA is price weighted, when companies have a stock split, their
prices decline and, therefore, the weight of the stock in the DJIA is reduced—even though
the firm may be large and growing. Therefore, the weighting scheme causes a downward bias
in the DJIA because high-growth stocks will have higher prices and because such stocks tend
to split, these stocks of growing companies will consistently lose weight within the index. For a
discussion of specific differences between indexes, see Ip (1998). Detailed reports of the Dow
Jones averages are contained daily in The Wall Street Journal and weekly in Barron’s.
Nikkei-Dow Jones Average Generally referred to as the Nikkei Stock Average Index, this is
an arithmetic mean of prices for 225 stocks on the First Section of the Tokyo Stock Exchange
(TSE) and shows stock price trends since the reopening of the TSE following World War II.
Similar to the DJIA, it is a price-weighted index and is likewise criticized because the 225
stocks only comprise about 15 percent of all stocks on the First Section. It is reported daily
in The Wall Street Journal and the Financial Times and weekly in Barron’s.
4.3.2 Value-Weighted Index
A value-weighted index is generated by deriving the initial total market value of all stocks
used in the index (Market Value Number of Shares Outstanding (or freely floating shares)
Current Market Price). Prior to 2004, the tradition was to consider all outstanding shares. In
mid-2004, Standard & Poor’s began only considering “freely floating shares” that exclude shares
held by insiders. This initial market value figure is established as the base and assigned an index
value (typically the beginning index value is 100, but it can be set at 10 or 50). Subsequently, a
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100
Part 1: The Investment Background
new market value is computed for all securities in the index, and the current market value is
compared to the initial “base” market value to determine the percentage change, which in turn
is applied to the beginning index value:
Pt Qt
Indext
Pb Qb
Beginning Index Value
where:
Indext
Pt
Qt
Pb
Qb
index value on day t
ending prices for stocks on day t
number of outstanding or freely floating shares on day t
ending price for stocks on base day
number of outstanding or freely floating shares on base day
The example for a three-stock index in Exhibit 4.3 indicates that there is an automatic
adjustment for stock splits and other capital changes with a value-weighted index because the
decrease in the stock price is offset by an increase in the number of shares outstanding. In a
value-weighted index, the importance of individual stocks in the sample depends on the market value of the stocks. Therefore, a specified percentage change in the value of a large company has a greater impact than a comparable percentage change for a small company. As
shown in Exhibit 4.4, if we assume that the only change is a 20 percent increase in the value
of stock A, which has a beginning value of $10 million, the total ending index value would be
$202 million, or an index value of 101. In contrast, if only stock C increases by 20 percent
from $100 million, the ending total value will be $220 million or an index value of 110. The
point is, price changes for large market value stocks in a value-weighted index will dominate
changes in the index value over time. Therefore, it is important to be aware of the large-value
stocks in the index.
E xh ib it 4 .3 Example of a Computation of a Value-Weighted Index
Stock
Copyright © 2018. Cengage. All rights reserved.
December 31, 2018
A
B
C
Share Price
Number of Shares
Market Value
$10.00
15.00
20.00
1,000,000
6,000,000
5,000,000
$ 10,000,000
90,000,000
100,000,000
Total
$200,000,000
December 31, 2019
A
B
C
Base Value Equal to an Index of 100
$12.00
10.00
20.00
1,000,000
12,000,000a
5,500,000b
Total
$ 12,000,000
120,000,000
110,000,000
$242,000,000
New Index Value
Current Market Value
Base Value
$242,000,000
100
$200,000,000
1 21 100
Beginning Index Value
121
a
Stock split two-for-one during the year.
b
Company paid a 10 percent stock dividend during the year.
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Chapter 4: Security Market Indexes and Index Funds
101
E x h ib it 4 .4 Demonstration of the Impact of Different Market Values on a Market-Value-Weighted Stock Index
DECEMBER 31, 2017
DECEMBER 31, 2018
Case A
Stock
A
B
C
Case B
Number of Shares
Price
Value
Price
Value
Price
Value
1,000,000
6,000,000
5,000,000
$10.00
15.00
20.00
$ 10,000,000
90,000,000
100,000,000
$12.00
15.00
20.00
$ 12,000,000
90,000,000
100,000,000
$10.00
15.00
24.00
$ 10,000,000
90,000,000
120,000,000
$200,000,000
100.00
Index Value
$202,000,000
101.00
$220,000,000
110.00
Copyright © 2018. Cengage. All rights reserved.
4.3.3 Unweighted Index
In an unweighted index, all stocks carry equal weight regardless of their price or market value.
A $20 stock is as important as a $40 stock, and the total market value of the company is
unimportant. Such an index can be used by individuals who randomly select stock for their
portfolio or invest the same dollar amount in each stock. One way to visualize an unweighted
index is to assume that equal dollar amounts are invested in each stock in the portfolio (e.g.,
an equal $1,000 investment in each stock would work out to 50 shares of a $20 stock, 100 shares
of a $10 stock, and 10 shares of a $100 stock). In fact, the actual movements in the index are
typically based on the arithmetic mean of the percent changes in price or value for the stocks in
the index. The use of percentage price changes means that the price level or the market value of
the stock does not make a difference—each percentage change has equal weight.
Exhibit 4.5 demonstrates the computation of an equal weighted index using the average of
the percent changes for each of the three stocks. There is also a comparison to the index value
if market value weights are used. As shown, the equal weighting result gives a higher index
value because of the large percent increase in value for the stock with the smallest market
value (the small-cap stock). In contrast, the market value weighted index did not do as well
because the large-cap stock (that has a large weight) experienced the poorest performance.
In contrast to computing an arithmetic mean of percentage changes, both Value Line and
the Financial Times Ordinary Share Index compute a geometric mean of the holding period
returns and derive the holding period yield from this calculation. Exhibit 4.6, which contains
an example of an arithmetic and a geometric mean, demonstrates the downward bias of the
geometric calculation. Specifically, the geometric mean of holding period yields (HPY) shows
an average change of only 5.3 percent versus the actual change in wealth of 6 percent.
E x h ib it 4 .5 Computation of Index Value Assuming Equal Weights for Sample Stocks
DECEMBER 31, 2017
Stock
X
Y
Z
DECEMBER 31, 2018
Number of
Shares
Price
Value
Price
Value
2,000,000
8,000,000
10,000,000
$20
15
30
$ 40,000,000
120,000,000
300,000,000
$30
20
33
$ 60,000,000
160,000,000
330,000,000
50.0
33.3
10.0
$550,000,000
93.3/3 = 31.1
$460,000,000
Equal Wtd Index : 100
1 311
Market Value Wtd Index : 100
131 100
550,000,000
460,000,000
Percent Change
119 565
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102
Part 1: The Investment Background
E xh ib it 4 .6 Example of an Arithmetic and Geometric Mean of Percentage Changes
SHARE PRICE
Stock
X
Y
Z
Π
1 20
T
T+1
HPR
HPY
10
22
44
12
20
47
1.20
0.91
1.07
0.20
0.09
0.07
0 91
1 07
(0 20)
( 0 09)
1 168
1 1681/ 3
1 0531
Index Value (T ) 1 0531
Index Value (T ) 1 06
(0 07)
0 18
0 18/ 3
0 06
6%
Index Value (T
Index Value (T
1)
1)
Copyright © 2018. Cengage. All rights reserved.
4.3.4 Fundamental Weighted Index
As noted, one of the rationales for using market-value weighting is that the market value
of a firm is an obvious measure of its economic importance. In contrast, some observers
contend that this weighting scheme results in overweighting overvalued stocks over time
and underweighting undervalued stocks. A prime example is what transpired during the
technology boom in the 1998–2000 period when technology stocks exploded in price and, in
retrospect, were clearly overvalued—selling for 60–70–100 times earnings. As a result, the high
valuations caused the weight of the technology sector in the indexes to almost double, the result
was an overweight in overvalued stocks. You can envision an opposite example for undervalued
stocks.
In response to this implicit problem with market-value weighting, some observers have
suggested other measures of a company’s economic footprint. The leading advocates of an
approach that weights firms based on company fundaments are individuals involved with
Research Affiliates, Inc. (Arnott, Hsu, and West, 2008). Their approach to creating a Fundamental Index is an example of employing some widely used fundamental factors.4 Specifically,
they proposed four broad fundamental measures of size: (1) sales, (2) profits (cash flow),
(3) net assets (book value), and (4) distributions to shareholders (dividends). Given these variables for a large sample of firms, they created an index of 1,000 of the largest firms and computed the percent of each firm’s sales, cash flow, book value, and dividends to the total for the
sample and determined a company’s relative size (weight) by averaging the weights of the four
size metrics across the trailing five years (to avoid the impact of cyclicality). The authors contend that this index (entitled Research Associates Fundamental Index [RAFI]) is representative, but also ensures high liquidity, high quality, and low turnover.
As noted earlier, this is an example of such an index—other firms and authors can and
have created indexes with single variables or a different set of fundamental variables to determine the weights.
4.3.5 Style Indexes
Financial service firms such as Dow Jones, Moody’s, Standard & Poor’s, and Russell are generally very fast in responding to changes in investment practices. One example is the growth in
popularity of small-cap stocks following academic research in the 1980s that suggested that
4
For further discussion of the justification and details on the variables and construction, see Arnott, Hsu, and West
(2008).
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Chapter 4: Security Market Indexes and Index Funds
103
over long-term periods, small-cap stocks outperformed large-cap stocks on a risk-adjusted basis.
In response to this, Ibbotson Associates created the first small-cap stock index, and this was followed by small-cap indexes by Frank Russell Associates (the Russell 2000 Index), the Standard &
Poor’s 600, the Wilshire 1750, and the Dow Jones Small-Cap Index. For a comparative analysis
of these indexes, see Reilly and Wright (2002). This led to sets of size indexes, including largecap, mid-cap, small-cap, and micro-cap. These new size indexes can be used to evaluate the performance of money managers who concentrated in those size sectors.
The next innovation was for money managers to concentrate in types of stocks—that is,
growth stocks or value stocks. As this money management innovation evolved, the financial
services firms again responded by creating indexes of growth stocks and value stocks based
on relative P/E, price–book value, price–cash flow ratios, and other metrics, such as return on
equity (ROE) and revenue growth rates.
Eventually, these two factors (size and type) were combined into six major style categories:
Small-cap growth
Mid-cap growth
Large-cap growth
Small-cap value
Mid-cap value
Large-cap value
Currently, most money managers identify their investment style as one of these, and in turn
consultants use these style categories to identify money managers.
The most recent style indexes are those created to track ethical funds referred to as socially
responsible investment (SRI) funds. These SRI indexes are further broken down by country and
include a global ethical stock index.
The best source for style stock indexes (both size and type of stock) is Barron’s.
Exhibit 4.7 shows the stock market indexes from The Wall Street Journal, which contains
values for many of the U.S. stock indexes we have discussed. Exhibit 4.8 shows a table for
numerous international stock indexes contained in The Wall Street Journal.
Copyright © 2018. Cengage. All rights reserved.
4.3.6 Global Equity Indexes
As shown in Exhibits 4.8 and 4A.2 (the latter is in this chapter’s appendix), there are stock
market indexes available for most individual foreign markets. While these local indexes are
closely followed within each country, a problem arises in comparing the results implied by
these indexes for different countries because of a lack of consistency among them in terms of
sample selection, weighting, or computational procedure. To solve these comparability problems, several investment data firms have computed a set of consistent country stock indexes.
As a result, these indexes can be directly compared and combined to create various regional
indexes (e.g., Pacific Basin). In the following sections, we describe the three major sets of
global equity indexes.
FT/S&P-Actuaries World Indexes The FT/S&P-Actuaries World Indexes are jointly compiled by the Financial Times Limited, Goldman Sachs & Company, and Standard & Poor’s
(the “compilers”) in conjunction with the Institute of Actuaries and the Faculty of Actuaries.
Approximately 2,500 equity securities in 30 countries are included, covering at least 70 percent
of the total value of all listed companies in each country. All securities included must allow
direct holdings of shares by foreign nationals.
The indexes are market value weighted and have a base date of December 31, 1986 100.
The index results are typically reported in U.S. dollars, but, on occasion, have been reported in
U.K. pound sterling, Japanese yen, euros, and the local currency of the country. In addition to
the individual countries and the world index, there are several geographic subgroups, subgroups by market value, and by industry sectors. These indexes are available daily in the
Financial Times.
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104
Part 1: The Investment Background
E xh ib it 4 .7 U.S. Major Stock Market Indexes
High
Dow Jones
Industrial Average
Latest Week
Close
Net chg
21506.21 21197.08 21349.63
–45.13
9563.73
175.06
706.91
–18.36
25383.83 24931.22 25124.96 –132.15
Transportation Avg
9606 16 9383.67
Utility Average
Total Stock Market
Low
734.65
Barron’s 400
651.38
704.53
639.61
646.24
% chg
–0.21
Low
52 Week
Close( )
High
% chg
% chg
YFD 3-yr.ann.
17888.28
21528.99
18.9
8.0
8.3
7557.62
9593.95
26.5
5.7
5.3
–2.53
625.44
737.51
–1.3
7.2
7.1
–0.52
21498.96
25399.65
15.9
7.9
6.9
514.60
650.48
23.8
7.4
6.3
1.86
0.12
0.77
Nasdaq Stock Market
Nasdaq Composite
6303.45 6087.81
6140.42 –124.83
–1.99
4822.90
6321.76
26.3
14.1
11.7
Nasdaq 100
5845.15 5599.44
5646.92 –156.19
–2.69
4410.75
5885.3
27.3
16.1
13.6
500 Index
2450.42 2405.70
2423.41
–14.89
–0.61
2085.18
2453.46
15.2
8.2
7.3
MidCap 400
1760.30 1730.56
1746.65
2.70
0.15
1476.68
1769.34
16.4
5.2
6.8
846.92
855.85
2.68
0.31
700.06
866.07
20.5
2.1
7.8
1428.03 1403.02
Standard & Poor’s
SmallCap 600
862.34
Other Indexes
Russell 2000
NYSE Composite
Value Line
NYSE Arca Biotech
NYSE Arca Pharma
KBW Bank
1415.36
0.58
0.04
1139.45
1425.98
22.4
4.3
5.9
11837.60 11683.31 11761.70
28.50
0.24
10289.35
11833.34
11.8
6.4
2.3
522.71
1.94
0.37
453.96
529.13
13.3
3.3
1.2
2834.14
4016.86
24.5
25.5
11.6
525.84
517.70
4017.65 3842.77
3859.60 –157.26
550.67
534.89
536.30
–12.62
97.09
91.46
95.60
4.06
PHLX§ Gold/Silver
83.80
79.96
80.78
–2.65
PHLX§ Oil Service
132.65
127.39
130.80
–2.87
PHLX§ Semiconductor 1099.41 1026.05
1034.91
–53.58
11.18
1.16
CBOE Volatility
15.16
9.68
–3.91
–2.30
463.78
554.66
0.9
11.4
0.8
4.44
62.34
99.33
48.9
4.1
10.3
73.03
112.86 –21.2
2.4
–7.1
2.24
127.17
192.66 –24.0
672.51
1138.25 –51.1
9.75
22.51 –24.3
–3.17
–4.92
11.58
–28.8 –25.1
14.2 –17.6
–20.4
–1.1
§Philadelphla Stock Exchange
Copyright © 2018. Cengage. All rights reserved.
Source: Data from The Wall Street Journal, July 3, 2017, p. B9. Copyright 2017, Dow Jones & Co. Inc. All rights reserved
worldwide.
Morgan Stanley Capital International (MSCI) Indexes The Morgan Stanley Capital
International Indexes consist of three international, 22 national, and 38 international industry
indexes. The indexes consider some 1,673 companies listed on stock exchanges in 22 countries,
with a combined market capitalization that represents approximately 60 percent of the aggregate
market value of the stock exchanges of these countries. All the indexes are market value weighted.
The following relative valuation information is available: (1) price-to-book value (P/BV) ratio,
(2) price-to-cash earnings (earnings plus depreciation) (P/CE) ratio, (3) price-to-earnings (P/E)
ratio, and (4) dividend yield (YLD). These ratios help in analyzing different valuation levels
among countries and over time for specific countries.
Notably, the Morgan Stanley group index for Europe, Australia, and the Far East (EAFE) is
the basis for futures and options contracts on the Chicago Mercantile Exchange and the Chicago
Board Options Exchange.
Dow Jones Global Stock Market Indexes The Dow Jones Global Indexes is composed of
more than 2,200 companies worldwide and organized into 120 industry groups. The index
includes 35 countries representing more than 80 percent of the combined capitalization of
these countries. In addition to the 35 individual countries shown in Exhibit 4.9, the countries
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
Chapter 4: Security Market Indexes and Index Funds
105
E x h ib it 4 .8 International Stock Market Indexes
Region/Country Index
World
DJTSM
Americas
Brazil
Canada
Mexico
Chile
Latest Week
% chg
The Global Dow
DJ Global Index
DJ Global ex U.S.
Global Dow Euro
2769.39
359.68
240.94
2286.32
Global
Global ex U.S.
Developed ex U.S.
Global Small-Cap
Global Large-Cap
3704.12
2434.91
2367.72
5055.79
3512.27
–0.34
–0.16
DJ Americas
Sao Paulo Bovespa
S&P/TSX Comp
IPC All-Share
Santlago IPSA
582.63
62899.97
15182.19
49857.49
3606.79
–0.40
Stoxx Europe 600
Stoxx Europe 50
Euro Stoxx
Eurozone
Euro Stoxx 50
Bel-20
Belgium
CAC 40
France
DAX
Germany
Tel Avlv
Israel
FTSE MIB
Italy
Netherlands AEX
IBEX 35
Spain
SX All Share
Sweden
Switzerland Swiss Market
FTSE 100
U.K.
379.37
3122.17
372.86
3441.88
3793.62
5120.68
12325.12
1433.63
20584.23
507.15
10444.50
576.91
8906.89
7312.72
Asia-Pacific
Australia
China
Hong kong
India
Japan
Singapore
South Korea
Taiwan
1624.81
5721.50
3192.43
25764.58
30921.61
20033.43
3226.48
2391.79
10395.07
Europe
Copyright © 2018. Cengage. All rights reserved.
Close
DJ Asia-Pacific TSM
S&P/ASX 200
Shanghai Composite
Hang Seng
S&P BSE Sensex
Nikkel Stock Avg
Straits Times
Kospi
Weighted
Low
0.00
–0.37
–0.16
–1.80
–0.19
0.02
–0.40
2.97
–0.90
1.79
–0.40
–2.13
–2.18
–2.61
–2.87
–1.30
–2.76
–3.21
–0.32
–1.20
–2.38
–1.75
–2.92
–1.39
–1.50
–0.35
0.10
1.09
0.37
–0.70
–0.49
0.53
0.55
0.17
52-Week Range
Close
High
YTD
% chg
2284.45
305.56
201.47
1942.86
2790.26
362.91
243.70
2398.98
9.4
10.3
12.6
1.2
3142.64
2035.51
1986.18
4234.42
2986.56
3735.77
2462.44
2398.94
5086.94
3545.24
10.2
12.7
12.0
9.4
10.4
502.62
51842.27
14064.54
44364.17
3113.51
588.47
69052.03
15922.37
49939.47
3782.66
7.8
4.4
–0.7
9.2
11.9
318.76
2730.05
295.77
2761.37
3236.01
4085.30
9373.26
1378.66
15424
422.18
7926.2
459.48
7593.20
6463.59
396.45
3276.11
392.06
3658.79
4041.03
5432.40
12888.95
1478.96
21788
536.26
11135.4
596.72
9127.61
7547.63
5.0
3.7
6.5
4.6
5.2
5.3
7.4
–2.5
7.0
5.0
11.7
7.9
8.4
2.4
1359.38
5156.6
2932.48
20495.29
25765.14
15106.98
2787.27
1953.12
8575.75
1640.63
5956.5
3288.97
26063.06
31311.57
20230.41
3271.11
2395.66
10513.96
14.2
1.0
2.9
17.1
16.1
4.8
12.0
18.0
12.3
Source: SIX Financial Information WSJ Market Data Group
Source: Data from The Wall Street Journal, July 3, 2017, p. B9. Copyright 2017, Dow Jones & Co. Inc. All rights reserved
worldwide.
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
106
Part 1: The Investment Background
E xh ib it 4 .9 Dow Jones Global Stock Market Indexes
Copyright © 2018. Cengage. All rights reserved.
Region/Country
DJ Global
Indexes,
Local Curr.
04/23/17
Wkly
% Chg.
Americas
Brazil
91591225.27
—
Canada
5015.08
Chile
7843.25
—
Mexico
31335.08
—
U.S.
25257.11
Latin America
Europe
Austria
3408.18
—
Belgium
6094.87
—
Denmark
10647.89
Finland
14551.48
—
France
3886.74
Germany
4035.97
—
Greece
439.04
Ireland
5401.39
—
Italy
2084.11
—
Netherlands
4925.83
Norway
4418.22
—
Portugal
1384.06
—
Russia
1533.48
Spain
4303.54
—
Sweden
10795.45
Switzerland
6213.31
United Kingdom
3297.95
—
South Africa
16922.06
Pacific Region
Australia
3529.73
—
China
2870.64
Hong Kong
5252.22
India
3445.20
—
Japan
999.92
Malaysia
3470.36
—
New Zealand
2337.36
Philippines
7727.40
—
Singapore
2185.56
—
South Korea
4643.22
Taiwan
2495.40
Thailand
2943.32
Euro Zone
Europe Developed (ex. U.K.).
Europe (Nordic)
Pacific (ex. Japan)
World (ex. US)
DOW JONES GLOBAL, TOTAL STOCK
MARKET INDEX
GLOBAL DOW
Indexes based on 12/ 31/ 91 1000.
0.98
0.90
1.39
0.37
0.26
0.72
1.51
0.98
0.26
0.10
0.23
1.54
0.51
0.49
0.27
0.78
1.99
2.60
1.10
0.40
0.64
0.53
1.81
1.07
2.01
0.43
0.61
0.96
0.65
0.10
0.59
0.10
0.91
2.31
0.30
DJ Global
Indexes,
U.S.$
04/23/17
5866.04
10844.87
4370.02
4440.58
5349.35
25257.11
5672.49
1240.02
2973.20
5319.72
9488.39
11353.42
3438.68
3509.80
253.22
5357.33
1493.75
4285.94
3130.18
1033.11
740.33
2821.92
6875.40
8623.33
2247.09
3584.10
1630.44
3516.03
2853.64
5237.08
2403.79
1121.38
2201.49
3149.47
3995.85
2554.48
3091.06
2115.74
2045.14
2231.71
2967.03
6302.56
2837.68
2438.71
2718.57
2789.26
Wkly
% Chg.
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.24
2.35
0.77
1.24
0.50
0.26
1.50
0.22
1.71
1.50
0.98
0.25
0.11
0.22
1.56
0.50
0.47
0.28
0.54
1.97
0.46
1.09
0.25
1.08
1.03
1.03
0.42
1.74
2.02
0.44
0.74
0.42
0.95
0.51
1.26
0.37
0.49
2.14
0.35
0.25
0.06
0.24
0.42
0.10
0.18
DJ Global
Indexes,
U.S.$ on
12/31/16
Point Chg.
From 12/31/16
5427.02
11028.00
4317.31
3918.60
4352.19
23276.73
5820.64
2349.82
2326.67
4844.11
7756.84
9549.40
2938.75
3034.14
198.77
4668.61
1293.97
3586.49
3142.76
911.62
840.07
2335.44
5931.68
7395.62
2085.69
3308.21
1422.73
3339.07
2331.94
4514.05
1926.97
1013.18
1909.58
2791.92
3557.60
2200.00
2461.43
1764.41
1895.74
2766.10
3402.82
5437.03
2257.30
2160.43
2280.23
438.04
— 183.13
52.70
521.99
997.16
1980.38
452.85
390.19
646.53
475.62
1731.55
1604.03
497.93
475.65
54.45
688.72
199.78
699.45
— 12.58
121.49
— 99.74
488.48
943.72
1227.52
161.19
275.89
287.71
176.96
521.70
723.02
476.62
108.21
291.90
357.55
438.25
354.48
629.64
351.34
149.40
485.81
584.27
685.52
589.77
278.22
258.47
% Chg.
From
12/31/16
5.97
—
1.66
1.22
13.32
22.91
8.51
8.29
13.69
27.79
9.82
22.32
18.69
16.94
15.68
27.39
14.75
15.44
19.50
—
0.40
13.33
— 11.87
20.83
15.91
16.60
7.73
8.34
14.60
5.30
22.37
16.02
24.74
10.68
15.29
12.61
12.32
16.11
25.58
19.91
7.68
16.83
16.58
15.92
17.44
12.53
10.61
0.14
2531.51
237.75
9.39
©2017 Dow Jones & Co. Inc. All Rights Reserved.
Source: Data from Barron’s, June 26, 2017, Page M 27. Copyright 2017, Dow Jones & Co. Inc. All rights reserved worldwide.
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
Chapter 4: Security Market Indexes and Index Funds
107
E xh ib it 4 .1 0 Correlations of Percentage Price Changes of Alternative World Stock
Indexes, 12/31/91–12/31/16
U.S. Dollars
Financial Times/S&P–MSCI
Financial Times/S&P–Dow Jones Global
MSCI-Dow Jones Global
.996
.995
.993
are grouped into three major regions: Americas, Europe, and Pacific Region and some subregions. Finally, each country’s index is calculated in its own currency as well as in U.S. dollars.
The index for the individual countries is reported daily in The Wall Street Journal and the full
presentations as shown in Exhibit 4.9 is published weekly in Barron’s.
Comparison of World Stock Indexes As shown in Exhibit 4.10, the correlations between
the three global stock series since December 31, 1991, when the DJ series became available,
indicate that the results with the various world stock indexes are quite comparable.
A summary of the characteristics of the major price-weighted, market-value-weighted, and
equal-weighted stock price indexes for the United States and major foreign countries is contained in Exhibit 4A.1 in the chapter appendix. As shown, the major differences are the number of stocks in alternative indexes, but more important is the source of the sample (e.g., stocks
from the NYSE, NASDAQ, all U.S. stocks, or stocks from a foreign country such as the United
Kingdom or Japan).
Copyright © 2018. Cengage. All rights reserved.
4.4 BOND MARKET INDEXES5
Investors know little about the growing number of bond market indexes currently available
because these indexes are relatively new and not widely published. Still, knowledge regarding
these indexes are important because of the growth of fixed-income money managers and mutual
funds and the consequent need to have a reliable set of benchmarks to use in evaluating their
performance. Also, because the performance of many fixed-income money managers has been
unable to match that of the aggregate bond market, interest has been growing in bond index
funds, which requires appropriate indexes to emulate.
Notably, it is more difficult to create and compute a bond market index than a stock market
index for several reasons. First, the universe of bonds is much broader than that of stocks, ranging from U.S. Treasury securities to bonds in default. Second, the universe of bonds is changing
constantly because of new issues, bond maturities, calls, and bond sinking funds. Third, the volatility of prices for individual bonds and bond portfolios changes because bond price volatility is
affected by duration, which is likewise changing constantly because of changes in maturity, coupon, and market yield.6 Finally, significant problems can arise in correctly pricing the individual
bond issues in an index (especially corporate and mortgage bonds) compared to the current and
continuous transactions prices available for most stocks used in stock indexes.
Our subsequent discussion contains the following three subsections: (1) U.S. investment-grade
bond indexes, including Treasuries; (2) U.S. high-yield bond indexes; and (3) global government
bond indexes. All of these indexes indicate total rates of return for the portfolio of bonds and are
market value weighted. Exhibit 4.11 contains a summary of the characteristics for the indexes
available for these three segments of the bond market.
5
The discussion in this section draws heavily from Reilly and Wright (2012).
6
This concept of duration is discussed in detail in Chapter 13.
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
6,000
300+
500+
1,800
2,000
1,200
800
700
Merrill Lynch
Ryan Treasury
U.S. High-Yield Bond
Indexes
C. S. First Boston
Bloomberg Barclays
Merrill Lynch
Global Government
Bond Indexes
Bloomberg Barclays
Merrill Lynch
J. P. Morgan
Source: Created by the authors.
8,000
Number
of Issues
Bloomberg Barclays
Name of Index
Size of Issues
Market value
Market value
Market value and
equal
Market value
Market value
Weighting
Over 1 Year Over $100 million
Over 1 Year Over $50 million
Market value
Market value
Market value
Year Over $25 million Market value
Over 1 Year Over $200 million
Over 1
All
Over $75 million
Maturities
Over 1 Year Over $100 million
Over 1 Year All Treasury
Over 1 Year Over $50 million
Over 1 Year Over $250 million
Maturity
E xh ib it 4 .1 1 Summary of Bond Market Indexes
Copyright © 2018. Cengage. All rights reserved.
Trader priced
Trader Priced
Trader Priced
Trader priced
Trader priced
Trader priced
Trader priced
and model
priced
Trader priced
Trader priced
and model
priced
Pricing
Yes in Index
Yes
Yes
Yes
No
Yes
In specific
bonds
In specific
bonds
No
Reinvestment
Assumption
Composite and 13
countries, local and
U.S. dollars
Composite and 9
countries, local and
U.S. dollars
Composite and 11
countries, local and
U.S. dollars
Composite and by
rating
Composite and by
rating
Composite and by
rating
Government,
gov./corp., corporate
mortgage-backed,
asset-backed
Government,
gov./corp.,
corporate, mortgage
Treasury
Subindexes Available
108
Part 1: The Investment Background
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
Chapter 4: Security Market Indexes and Index Funds
109
4.4.1 U.S. Investment-Grade Bond Indexes
As shown in Exhibit 4.11, three investment firms have created and maintain indexes for
Treasury bonds and other bonds considered investment grade, that is, the bonds are rated
BBB (or Baa) or higher. As demonstrated in a subsequent section, the relationship among the
returns for these investment-grade bonds is strong (that is, correlations average about 0.95),
regardless of the segment of the market.
4.4.2 High-Yield Bond Indexes
One of the fastest-growing segments of the U.S. bond market during the past 30 years has
been the high-yield bond market, which includes bonds that are not investment grade—that
is, they are rated Ba, B, Caa, Ca, and C. Because of this growth, three investment firms created
indexes related to this market. A summary of the characteristics for these indexes is included
in Exhibit 4.11. For an analysis of the alternative high-yield bond benchmarks, see Reilly and
Wright (1994); for an overall analysis of this market, see Reilly, Wright, and Gentry (2009).
4.4.3 Global Government Bond Indexes
The global bond market has likewise experienced significant growth in size and importance during the past 15 years. Notably, this global bond segment is dominated by government (sovereign)
bonds because most non-U.S. countries do not have a viable corporate bond market. Once again,
three major investment firms have created indexes that reflect the performance for the global
bond market. As shown in Exhibit 4.11, although the various indexes have similar computational
characteristics, the total sample sizes and the number of countries included differ. Exhibit 4.12 is a
table available daily in The Wall Street Journal that contains current results for a variety of
domestic and global bond indexes.
Copyright © 2018. Cengage. All rights reserved.
4.5 COMPOSITE STOCK–BOND INDEXES
Beyond separate stock indexes and bond indexes for individual countries, a natural step is the
development of a composite index that measures the performance of all securities in a given
country. With a composite index investors can examine the benefits of diversifying with a
combination of asset classes such as stocks and bonds in addition to diversifying within the
asset classes of stocks or bonds. There are two such indexes available.
First, a market-value-weighted index called Merrill Lynch-Wilshire Capital Markets Index
(ML-WCMI) measures the total return performance of the combined U.S. taxable fixed
income and equity markets. It is basically a combination of the Merrill Lynch fixed-income
indexes and the Dow Jones Total Stock Market common-stock index. As such, it tracks more
than 10,000 U.S. stocks and bonds. As of late 2017, the relative weights are about 40 percent
bonds and 60 percent stocks.
The second composite index is the Brinson Partner Global Security Market Index (GSMI),
which contains U.S. stocks and bonds as well as non-U.S. equities and nondollar bonds. The
specific breakdown as of July 2017 was:
Percent (%)
J.P. Morgan Emerging Market Bond Index Global
Merrill Lynch U.S. High Yield Cash Pay Constrained
MSCI All Country World Stock Index (Not LU) (in USD)
Citigroup World Global Bond Index Non-U.S. (in USD)
Citigroup World Global Bond Index U.S. only (in USD)
Total
2.0
3.0
65.0
15.0
15.0
100.00
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
110
Part 1: The Investment Background
E xh ib it 4 .1 2 Listing of Bond Yields and Returns for Domestic and Global Indexes
Return on investment and spreads over Treasurys and/or yields paid to investors compared with 52-week
highs and lows for different types of bonds
Total
return
close
YTD total
return (%)
Index
Yield (%)
Latest Low High
3.5
U.S. Aggregate
2.580 2.160 2.790
U.S. Corporate Indexes Bloomberg Barclays
2786.99
5.9
YTD total
return (%)
Yield (%)
Latest Low High
Index
Mortgage-Backed Bloomberg Barclays
Broad Market Bloomberg Barclays
1946.20
Total
return
close
1991.29
2.5
Mortgage-Backed
Ginnie Mae (GNMA) 2.770 2.240 3.090
2.820 2.330 3.120
1957.25
2.0
U.S. Corporate
3.160 3.000 3.520
1168.21
2.7
Fannle Mae (FNMA)
Intermediate
2.720 2.420 3.010
1798.88
2.8
Freddie Mac (FHLMC) 2.840 2.370 3.130
2.830 2.360 3.120
2624.09
4.0
3871.22
10.1 Long term
4.100 4.100 4.170
523.70
4.4 Double-A-rated
2.650 2.350 2.870
366.51
5.5
7-12 year
1.937 1.688 2.618
3.440 3.340 3.870
411.86
6.8
12-22 year
2.352 2.137 3.047
398.09
7.3
22-plus year
2.787 2.609 3.622
568.62
719.83
6.5
Triple-B-rated
High Yield Bonds Merrill Lynch
417.16
7.4
8.8
High Yield Constrained 5.567 5.373 6.858
5.0 Muni Master
1.935 1.689 2.516
Global Government J.P. Morgan†
Triple-C-rated
10.505 9.584 13.189
545.88
1.7
Global Government 1.380 1.110 1.560
6.6
High Yield 100
5.251 4.948 6.448
759.18
0.8
Canada
378.90
7.6
5.054 4.934 6.450
n.a
308.77
7.6
Global High Yield
Constrained
Europe High Yield
Constrained
1.897 1.897 3.814
715.65
418.34
2861.82
U.S. Agency Bloomberg Barclays
1642.07
1467.08
2.3
1.4
U.S. Agency
10-20 years
511.02
1.980 1.390 2.010
1.830 1.210 1.840
564.08
3382.19
8.2 20-plus years
2.880 2.730 3.460
922.61
2463.06
5.0 Yankee
2.810 2.510 3.090
797.00
n.a
EMU§
n.a
1.3
–0.7
0.1
288.56
1.960 1.470 2.190
–0.4
1.0
7.8
n.a.
n.a
France
0.760 0.570 1.210
Germany
0.410 0.210 0.620
Japan
0.390 0.170 0.460
Netherlands
0.530 0.340 0.760
U.K.
1.570 1.340 1.790
Emerging Markets** 5.618 5.279 6.290
*Constrained indexes limit individual issuer concentrations to 2% the High Yield 100 are the 100 largest bonds
†In local currency § Euro-zone bonds
Sources: Merrill Lynch: Bloomberg Barclays: J.P. Morgan
**EMBI Global Index
Copyright © 2018. Cengage. All rights reserved.
Source: Reprinted with permission of The Wall Street Journal, November 8, 2017, p. B11. Copyright 2017 by Dow Jones &
Co. Inc. All Rights Reserved.
The index is balanced to the policy weights monthly.
Because the GSMI contains both U.S. and international stocks and bonds, it is clearly the
most diversified benchmark available with a weighting scheme that approaches market values.
As such, it is closest to the theoretically specified “market portfolio of risky assets” referred to
in the CAPM literature. This index was used in Reilly and Akhtar (1995) to demonstrate the
impact of alternative benchmarks when evaluating global portfolio performance and when calculating systematic risk (beta) measures.
4.6 COMPARISON
OF INDEXES OVER TIME
We now look at price movements in the different indexes for monthly intervals.
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Chapter 4: Security Market Indexes and Index Funds
111
4.6.1 Correlations between Monthly Equity Price Changes
Exhibit 4.13 contains a listing of the correlation coefficients of the monthly percentage of price
changes for a set of U.S. and non-U.S. equity-market indexes with the Dow Jones Total Stock
Market Index during the 36-year period from 1980 to 2016. The correlation differences are mainly
attributable to the different sample of firms listed on the various stock exchanges. All of the
indexes are market-value-weighted and include a large number of stocks. Therefore, the computational procedure is generally similar and the sample sizes are large or all-encompassing. Thus, the
major difference between the indexes is the samples of stocks that are from different segments of
the U.S. stock market or from different countries.
There is a high positive correlation (0.99) between the Dow Jones Total Stock Market Index
and the several comprehensive U.S. equity indexes: the S&P 500, the Russell 3000 and Russell
1000 large cap index. In contrast, there are lower correlations with various style indexes such
as the Russell 2000 Small-Cap index (0.850).
The correlations between the Dow Jones Total Stock Market Index and the several non-U.S.
indexes are clearly lower ranging from 0.460 (Pacific Basin) to 0.740 (Europe). All of these
results support the case for global investing. These diversification results were confirmed
with the composite international series—with the MSCI EAFE (0.640) and the IFC Emerging
Market (0.565) respectively. These results confirm the benefits of global diversification because,
as will be discussed in Chapter 7, such low correlations would definitely reduce the variance of
a pure U.S. stock portfolio.
4.6.2 Correlations between Monthly Bond Index Returns
Copyright © 2018. Cengage. All rights reserved.
The correlations with the monthly Bloomberg Barclays U.S. Aggregate bond return index in
Exhibit 4.13 consider a variety of bond indexes. The correlations with the U.S. investmentgrade bond indexes is about 0.93 confirming that although the level of interest rates differ
due to the risk premium, the overriding determinate of rates of return for investment-grade
bonds over time are Treasury interest rates.
In contrast, the correlations with high-yield bonds indicate a significantly weaker relationship
(correlations about 0.51) caused by the strong equity characteristics of high-yield bonds as shown
in Reilly, Wright, and Gentry (2009). Finally, the low and diverse relationships among U.S.
investment-grade bonds and all world government bonds (0.58) and world government bonds
without the United States (about 0.36) reflect different interest rate movements and exchange rate
effects (these non-U.S. government results are presented in U.S. dollar terms). Again, these results
support the benefits of global diversification of bond portfolios or stock portfolios.
E x h ib it 4 .1 3 Correlation Coefficients between Monthly Percentage Price Changes in Various Stock and Bond
Indexes: 1980–2016
Stock Indexes
S&P 500
Russell 3000
Russell 1000
Russell 2000
MSCI EAFE
MSCI Europe
MSCI Pacific Basin
IFC Emerging Mkts
FTSE All World
Brinson GSMI
Dow Jones
Total Stock
Market
0.990
0.993
0.995
0.850
0.640
0.740
0.460
0.565
0.940
0.926
Bond Indexes
BB Corporate Bds
BB High Yield Bds
ML World Govt Bds
ML World Govt Bds w/o U.S.
Treasury Bill–30 day
Treasury Bill–6 months
Treasury Note–2 years
Bloomberg Barclays U.S.
Aggregate Bond
0.931
0.506
0.580
0.359
0.195
0.520
0.920
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
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112
Part 1: The Investment Background
4.7 INVESTING
IN SECURITY MARKET INDEXES
As discussed in the initial section of this chapter, there are several uses for these security market series. Beyond measuring the rates of return and risk for a number of asset classes, the two
most significant uses are as a benchmark to measure the performance by portfolio managers
and to create index funds and/or exchange traded funds (ETFs). These two uses are closely
related because when professional institutions measured performance using these market series
they discovered that the vast majority of money managers could not match the risk-adjusted
performance of the benchmarks. The results of these studies led to the conclusion (recommendation) that many investors should not attempt to beat the market (the market series) by
engaging in active portfolio management that attempts to “beat the market” over time by
selecting undervalued stocks. The alternative investment philosophy is prompted by the
expression “if you can’t beat them, join them.” Specifically, if you can’t beat the benchmark,
you should buy (invest in) the benchmark.
Copyright © 2018. Cengage. All rights reserved.
Index Funds As we discuss in Chapter 17, mutual funds represent established security
portfolios managed by professional investment companies (e.g., Fidelity, Vanguard,
Putnam) in which investors can participate. The investment company decides how the
fund is managed. For an indexed portfolio, the fund manager will typically attempt to replicate the composition of the particular index exactly, meaning that he or she will buy the
exact securities comprising the index in their exact weights and then alter those positions
anytime the index composition is changed. Since changes to most equity indexes occur
sporadically, index funds tend to generate low trading and management expense ratios.
A prominent example of an index fund is Vanguard’s 500 Index Fund (VFINX), which is
designed to mimic the S&P 500 Index. Exhibit 4.14 provides a descriptive overview of this
fund and indicates that its historical return performance is virtually indistinguishable from
that of the benchmark.
The advantage of index mutual funds is that they provide an inexpensive way for investors
to acquire a diversified portfolio that emphasizes the desired market or industry within the
context of a traditional money management product. The disadvantages of mutual funds are
that investors can only liquidate their positions at the end of the trading day (i.e., no intraday
trading), usually cannot short sell, and may have unwanted tax repercussions if the fund sells a
portion of its holdings, thereby realizing capital gains.
Exchange-Traded Funds ETFs are a more recent development in the world of indexed
investment products than index mutual funds. Essentially, ETFs are depository receipts that
give investors a pro rata claim on the capital gains and cash flows of the securities that are
held in deposit by the financial institution that issued the certificates. That is, a portfolio of
securities is placed on deposit at a financial institution, which then issues a single type of certificate representing ownership of the underlying portfolio. In that way, ETFs are similar to the
American depository receipts (ADRs) described in Chapter 2.
There are several notable example of ETFs, including (1) Standard & Poor’s 500 Depository Receipts (SPDRs, or “spiders,” as they are sometimes called), which are based on all the
securities held in that index; (2) iShares, which recreate indexed positions in several global
developed and emerging equity markets, including countries such as Australia, Mexico,
Malaysia, the United Kingdom, France, Germany, Japan, and China; and (3) sector ETFs,
which invest in baskets of stocks from specific industry sectors, including consumer services,
industrial, technology, financial services, energy, utilities, and cyclicals/transportation.
Exhibit 4.15 shows descriptive and return data for the SPDR Trust certificates. Note, however, that the returns to these shares do not track the index quite as closely as did the
VFINX fund.
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Chapter 4: Security Market Indexes and Index Funds
E xh ib it 4 .1 4 Details of the Vanguard 500 Index Trust Mutual Fund
A. Description
VFINX US $ NAV 225.53 +0.07 Purch Prc 225.53
..... On 16 Jun
Page 1/4 Security Description
Report
VFINX US Equity
1) Profile 2) Performance 3) Holdings 4) Organizational
Objective Blend Large Cap
VANGUARD 500 INDEX-INV
Vanguard 500 Index Fund is an open-end fund incorporated in the USA. The Fund aims to track the
performance of the Standard & Poor's 500 Index, which is dominated by the stocks of large U.S.
companies. The Fund invests substantially all of its assets in the stocks that make up the Index.
[FIGI BBG000BHTMY2]
l COMP »
Bloomberg Classification
Fund Type
Asset Class
Market Cap
Strategy
Geo. Focus Country
7) NAV
USD 225.530 General Attribute
Assets
05/31/17
USD 225.83B
Return Percentile Fund Info
Performance
1.54%
67 Inception Date 08/31/1976
1 Month
Investor
9.66%
65 Share Class
YTD
USD 3.00k
19.41%
63 Min Investment
1 Year
10.03%
84 Min Subsequent
USD 1.00
3 Year
14.87%
74 Min IRA
N.A.
5 Year
.14%
Px Source NASDAQ Stock Market/T... Expense Ratio
6) Comparative Returns
20
2 yr Tax Rep vs Index
SPX
Index 19.2537
VFINX US Equity 18.1026
15
10
5
0
–5
2017
2015
Open-End Fund
Equity
Large-cap
Blend
U.S.
Index Fund
Fees
Front Load
Back Load
Early Withdrawal
Current Mgmt Fee
Performance Fee
12b1 Fee
.00%
.00%
.00%
.15%
N.A.
.00%
Australia 61 2 9777 8600 Brazil 5511 2395 9000 Europe 44 20 7330 7500 Germany 49 69 9204 1210 Hong Kong 852 2977 6000
Japan 81 3 3201 8900
Singapore 65 6212 1000
U.S. 1 212 318 2000
Copyright 2017 Bloomberg Finance L.P.
SN 335716 CDT GMT−5:00 G457−4046−0 19-Jun-2017 15:29:24
B. Historical Return Performance
Enter all values and hit <G0>
96) Create Reports
97) Show Definitions
Total Return
Performance
Tracking
Stats
VFINX US Equity
Single Fund
Source
Portfolio Default
Week
06/29/2007
Range
–
05/31/2017
Historical Fund Analysis
Seasonality
Benchmark Primary Benchmark
Hist Sim
d
Tracking Indicators
Alpha
Beta
Correlation
Mean Excess Return
Information Ratio
Jensen Alpha
R-Squared
Sortino Ratio Vs Index
Tracking Error
3.20514
Y = VANGUARD 500 INDEX-INV
Currency USD
Monthly
8.20514
Copyright © 2018. Cengage. All rights reserved.
SPX Index
–1.79486
Total
0.000
0.999
1.000
−0.114
−3.063
−0.122
0.999
0.000
0.037
Bull
−0.010
1.000
0.999
−0.115
−3.835
−0.175
0.999
−0.017
0.030
Bear
−0.011
0.999
0.999
−0.112
−2.333
−0.092
0.999
0.000
0.048
Legend
–6.79486
First Observation
o 14 Winning Periods
o 105 Losing Periods
–11.79486
–16.79486
–16.79486
–11.79486
–6.79486
–1.79486
3.20514
8.20514
07/31/2007
Regression Line
Breakeven Line
If the returns are mainly over the breakeven line,
the fund could be seen as a performance winner.
X = S&P 500 INDEX
Australia 61 2 9777 8600 Brazil 5511 2395 9000 Europe 44 20 7330 7500 Germany 49 69 9204 1210 Hong Kong 852 2977 6000
Japan 81 3 3201 8900
Singapore 65 6212 1000
U.S. 1 212 318 2000
Copyright 2017 Bloomberg Finance L.P.
SN 335716 CDT GMT−5:00 G457−4046−0 19-Jun-2017 15:33:38
Source: © 2017 Bloomberg L.P. All rights reserved.
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
113
114
Part 1: The Investment Background
E xh ib it 4 .1 5 Details of the SPDR Exchange-Traded Fund
A. Description
SPY US $
244.66
+2.02
T244.64 / 244.64P
26 × 1071
..... At 15:10 d Vol 62,705,728 0 243.59K
H 244.73Y
L 243.48Y
Val 15.315B
Page 1/5 Security Description : ETF
SPY US Equity
Report
1) Profile 2) Performance 3) Holdings 4) Allocations 5) Organizational
Objective Large-cap
SPDR S&P 500 ETF TRUST
SPDR S&P 500 ETF Trust is an exchange-traded fund incorporated in the USA. The EFT tracks the S&P
500 Index. The Trust consists of a portfolio representing all 500 stocks in the S&P 500 Index. It
holds predominantly large-cap U.S. stocks. This ETF is structured as a Unit Investment Trust and
pays dividends on a quarterly basis. The holdings are weighted by market capitalization. [FIGI
BBG000BDTBL9]
Bloomberg Classification
6) Comparative Returns l COMP »
Appropriations
1 yr Tot Ret vs Index
20
Fund Tybe
ETF
No
Leverage
15
No
Actively Managed
Asset Class
Equity
10
No
Swap Based
Market Cap
Large-cap
No
Derivatives Based
5
Strategy
Blend
No
Currency Hedged
0
Geo.
Focus
Co
U.S.
Full
Replication Strategy
–5
Jun
Sep
Dec
Mar
Jun
No
Securities Lending
2017
2016
Characteristics
7) Price
USD 244.66 Trading Data
0.000 11) Und. Index
SPXT
8) NAV
06/16/17
USD 242.65 Bid Ask Spread
INAV
70.6M Index Weight
Market Cap
USD 244.67 30D Avg Volume
Fund Percent Premium
–0.012% 10) Implied Liquidity
.380
41.0M Px Track. Error
.024
52 Wk H 06/09/17
USD 239.32B NAV Track. Error
USD 245.01 Market Cap
52 Wk L 06/09/16
01/22/93
978.2M Inception Date
USD 198.65 Shares Out
.095%
9) Options
USD 237.35B Expense Ratio
Yes Total Assets
Index 19.2618
SPXT
SPY US Equity 20.107
Australia 61 2 9777 8600 Brazil 5511 2395 9000 Europe 44 20 7330 7500 Germany 49 69 9204 1210 Hong Kong 852 2977 6000
Japan 81 3 3201 8900
Singapore 65 6212 1000
U.S. 1 212 318 2000
Copyright 2017 Bloomberg Finance L.P.
SN 335716 CDT GMT−5:00 G457−4046−0 19-Jun-2017 15:29:48
B. Historical Return Performance
Enter all values and hit <GO>
96) Create Reports
97) Show Definitions
Total Return
Performance
Tracking
Stats
SPY US Equity
Single Fund
Source
Portfolio Default
Week
06/29/2007
Range
-
05/31/2017
Tracking Indicators
Alpha
Beta
Correlation
Mean Excess Return
Information Ratio
Jensen Alpha
R-Squared
Sortino Ratio Vs Index
Tracking Error
3.20514
Y = SPDR S&P 500 ETF TRUST
SPX Index
Currency USD
Monthly
d
8.20514
Copyright © 2018. Cengage. All rights reserved.
Historical Fund Analysis
Seasonality
Benchmark Single Index
Hist Sim
–1.79486
Total
0.000
0.997
0.999
−0.106
−0.210
−0.099
0.998
0.000
0.507
Bull
−0.018
1.003
0.998
−0.102
−0.253
−0.286
0.997
−0.015
0.404
–11.79486
Legend
First Observation
07/31/2007
o 54 Winning Periods
Regression Line
o 65 Losing Periods
Breakeven Line
–16.79486
If the returns are mainly over the breakeven line,
the fund could be seen as a performance winner.
–6.79486
–16.79486
–11.79486
–6.79486
–1.79486
3.20514
Bear
−0.059
0.987
0.998
−0.114
−0.173
−0.570
0.997
0.000
0.661
8.20514
X = S&P 500 INDEX
Australia 61 2 9777 8600 Brazil 5511 2395 9000 Europe 44 20 7330 7500 Germany 49 69 9204 1210 Hong Kong 852 2977 6000
Japan 81 3 3201 8900
Singapore 65 6212 1000
U.S. 1 212 318 2000
Copyright 2017 Bloomberg Finance L.P.
SN 335716 CDT GMT−5:00 G457−4046−0 19-Jun-2017 15:33:00
Source: © 2017 Bloomberg L.P. All rights reserved. Reprinted with permission.
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Chapter 4: Security Market Indexes and Index Funds
115
A significant advantage of ETFs over index mutual funds is that they can be bought and
sold (and short sold) like common stock through an organized exchange or in an overthe-counter market. Further, they are backed by a sponsoring organization (e.g., for SPDRs,
the sponsor is PDR Services LLC, a limited liability company wholly owned by NYSE Euronext exchange where SPDR shares trade) that can alter the composition of the underlying
portfolio to reflect changes in the composition of the index. Other advantages relative to
index funds include an often smaller management fee, the ability for continuous trading
while markets are open, and the ability to time capital gain tax realizations. ETF disadvantages include the brokerage commission and the inability to reinvest dividends, except on a
quarterly basis.
SUMMARY
Given the several uses of security market indexes, it is
important to know how they are constructed and the
differences between them. To determine how the
market is doing, you need to be aware of what market
you are dealing with so you can select the appropriate
index. This choice is discussed in Merjos (1990).
Indexes are also used as benchmarks to evaluate
portfolio performance. In this case, you want the
index (benchmark) to be consistent with your
investing universe. For a bond portfolio, the index
should likewise match your investment philosophy.
Finally, if your portfolio contains both stocks and
bonds, you must evaluate your performance against
an appropriate combination of indexes.
Investors need to examine numerous market
indexes to evaluate the performance of their
investments. The selection of the appropriate
indexes for information or evaluation will depend
on how knowledgeable you are about the various
indexes. This chapter should help you understand
what to look for and how to make the right decision regarding benchmarks.
Passive equity portfolios attempt to track the
returns of an established benchmark, such as the
S&P 500, or one that meets the investor’s needs.
Index mutual funds and exchange-traded funds
are popular ways for small investors to make passive investments.
Copyright © 2018. Cengage. All rights reserved.
SUGGESTED READINGS
Fisher, Lawrence, and James H. Lorie. A Half Century
of Returns on Stocks and Bonds. Chicago: University
of Chicago Graduate School of Business, 1977.
Ibbotson, Duff and Phelps. Stocks, Bonds, Bills, and Inflation. Hoboken, NJ: John Wiley and Sons, Inc. Annual.
Siegel, Laurence B. Benchmarks and Investment
Management. The Research Foundation of AIMR,
Charlottesville, VA, 2003.
QUESTIONS
Discuss briefly several uses of security market indexes.
What major factors must be considered when constructing a market index? Put another
way, what characteristics differentiate indexes?
3. Explain how a market index is price weighted. In such a case, would you expect a $100
stock to be more important than a $25 stock? Give an example.
4. Explain how to compute a value-weighted index.
5. Explain how a price-weighted index and a value-weighted index adjust for stock splits.
1.
2.
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116
Part 1: The Investment Background
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
Copyright © 2018. Cengage. All rights reserved.
17.
Describe an unweighted price index and describe how you would construct such an index.
Assume a 20 percent price change in GM ($40/share; 50 million shares outstanding) and
Coors Brewing ($25/share and 15 million shares outstanding). Explain which stock’s 20
percent change will have the greater impact on this index.
If you correlated percentage changes in the Dow Jones Total Stock Market Index with
percentage changes in the NYSE composite and the NASDAQ composite index, would
you expect a difference in the correlations? Why or why not?
There are high correlations between the monthly percentage price changes for the alternative NYSE indexes. Discuss the reason for this similarity: is it size of sample, source of
sample, or method of computation?
Assume a correlation of 0.82 between the Nikkei and the TSE Composite Index. Examine
the correlation between the MSCI Pacific Basin Index and the DJTSM in Exhibit 4.13.
Explain why these relationships differ.
You learn that the Dow Jones Total Stock Market market-value-weighted index increased
by 16 percent during a specified period, whereas a Dow Jones Total Stock Market equalweighted index increased by 23 percent during the same period. Discuss what this difference in results implies.
Why is it contended that bond market indexes are more difficult to construct and maintain than stock market indexes?
Suppose the Dow Jones Total Stock Market market-value-weighted index increased by
5 percent, whereas the Merrill Lynch-Dow Jones Capital Markets Index increased by
15 percent during the same period. What does this difference in results imply?
Suppose the Russell 1000 increased by 8 percent during the past year, whereas the Russell
2000 increased by 15 percent. Discuss the implication of these results.
Based on what you know about the Financial Times (FT) World Index, the Morgan Stanley Capital International World Index, and the Dow Jones World Stock Index, what level
of correlation would you expect between monthly rates of return? Discuss the reasons for
your answer based on the factors that affect indexes.
How would you explain that the ML High-Yield Bond Index was more highly correlated
with the NYSE composite stock index than the ML Aggregate Bond Index?
Assuming that the mandate to a portfolio manager was to invest in a broadly diversified
portfolio of U.S. stocks, which two or three indexes should be considered as an appropriate benchmark? Why?
List two investment products that a manager following a passive investment strategy
could use to make an investment in the Standard & Poor’s 500 Index. Briefly discuss
which product is likely to be the most accurate method for tracking the index.
PROBLEMS
1. You are given the following information regarding prices for a sample of stocks.
PRICE
Stock
Number of Shares
T
T +1
A
B
C
1,000,000
10,000,000
30,000,000
60
20
18
80
35
25
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Chapter 4: Security Market Indexes and Index Funds
117
a. Construct a price-weighted index for these three stocks, and compute the percentage
change in the index for the period from T to T 1.
b. Construct a value-weighted index for these three stocks, and compute the percentage
change in the index for the period from T to T 1.
c. Briefly discuss the difference in the results for the two indexes.
2. a. Given the data in Problem 1, construct an equal-weighted index by assuming $1,000 is
invested in each stock. What is the percentage change in wealth for this portfolio?
b. Compute the percentage of price change for each of the stocks in Problem 1. Compute
the arithmetic mean of these percentage changes. Discuss how this answer compares to
the answer in part (a).
c. Compute the geometric mean of the percentage changes in part (b). Discuss how this
result compares to the answer in part (b).
3. For the past five trading days, on the basis of figures in The Wall Street Journal, compute
the daily percentage price changes for the following stock indexes.
a. DJIA
b. S&P 500
c. NASDAQ Composite Index
d. FT-100 Share Index
e. Nikkei 225 Stock Price Average
f. Discuss the difference in results for parts (a) and (b), (a) and (c), (a) and (d), (a) and
(e), and (d) and (e). What do these differences imply regarding diversifying within the
United States versus diversifying between countries?
4.
PRICE
SHARES
Company
A
B
C
A
B
C
Day
Day
Day
Day
Day
12
10
14
13
12
23
22
46
47
45
52
55
52
25
26
500
500
500
500
500
350
350
175a
175
175
250
250
250
500b
500
1
2
3
4
5
a
Split at close of day 2.
b
Copyright © 2018. Cengage. All rights reserved.
Split at close of day 3.
a. Calculate a Dow Jones Industrial Average for days 1 through 5.
b. What effects have the splits had in determining the next day’s index? (Hint: think of the
relative weighting of each stock.)
c. From a copy of The Wall Street Journal, find the divisor that is currently being used in
calculating the DJIA. (Normally this value can be found on pages C2 and C3.)
5. Utilizing the price and volume data in Problem 4,
a. Calculate a Standard & Poor’s Index for days 1 through 5 using a beginning index value
of 10.
b. Identify what effects the splits had in determining the next day’s index. (Hint: think of
the relative weighting of each stock.)
6. Based on the following stock price and shares outstanding information, compute the
beginning and ending values for a price-weighted index and a market-value-weighted
index.
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
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118
Part 1: The Investment Background
DECEMBER 31, 2017
Stock K
Stock M
Stock R
DECEMBER 31, 2018
Price
Shares Outstanding Price
Price
Shares Outstanding
20
80
40
100,000,000
2,000,000
25,000,000
32
45
42
100,000,000
4,000,000a
25,000,000
a
Stock split two-for-one during the year.
a. Compute the percentage change in the value of each index during the year.
b. Explain the difference in results between the two indexes.
c. Compute the percentage change for an unweighted index and discuss why these results
differ from those of the other indexes.
7. Given the monthly returns that follow, how well did the passive portfolio track the S&P
500 benchmark? Find the R2 , alpha, and beta of the portfolio. Compute the average return
differential with and without sign.
Month
5.0%
2.3
1.8
2.2
0.4
0.8
0.0
1.5
0.3
3.7
2.4
0.3
S&P 500 Return
5.2%
3.0
1.6
1.9
0.1
0.5
0.2
1.6
0.1
4.0
2.0
0.2
Copyright © 2018. Cengage. All rights reserved.
January
February
March
April
May
June
July
August
September
October
November
December
Portfolio Return
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
APPENDIX CHAPTER 4
Stock Market Indexes
Copyright © 2018. Cengage. All rights reserved.
E x h ib it 4 A.1 Summary of Stock Market Indexes
Name of Index
Weighting
Number of Stocks
Source of Stocks
Dow Jones Industrial
Average
Nikkei-Dow Jones
Average
S&P 400 Industrial
S&P Transportation
S&P Utilities
S&P Financials
S&P 500 Composite
NYSE
Industrial
Utility
Transportation
Financial
Composite
NASDAQ
Composite
Industrial
Banks
Insurance
Other finance
Transportation
Telecommunications
Computer
Biotech
AMEX Market Value
Dow Jones Total Stock
Market Index
Russell Indexes
3000
1000
2000
Financial Times
Actuaries Index
All Share
FT100
Small-Cap
Mid-cap
Combined
Tokyo Stock Exchange
Price Index (TOPIX)
Value Line Averages
Industrials
Utilities
Rails
Composite
Financial Times Ordinary
Share Index
FT-Actuaries World
Indexes
Price
30
NYSE, NASDAQ
Price
225
TSE
Market
Market
Market
Market
Market
value
value
value
value
value
400
20
40
40
500
NYSE,
NYSE,
NYSE,
NYSE,
NYSE,
Market
Market
Market
Market
Market
value
value
value
value
value
1,601
253
55
909
2,818
NYSE
NYSE
NYSE
NYSE
NYSE
Market
Market
Market
Market
Market
Market
Market
Market
Market
Market
Market
value
value
value
value
value
value
value
value
value
value
value
5,575
3,394
375
103
610
104
183
685
121
900
5,000
NASDAQ
NASDAQ
NASDAQ
NASDAQ
NASDAQ
NASDAQ
NASDAQ
NASDAQ
NASDAQ
AMEX
NYSE, AMEX, NASDAQ
Market value
Market value
Market value
3,000 largest in U.S.
1,000 largest of 3,000
2,000 smallest of 3,000
NYSE, AMEX, NASDAQ
NYSE, AMEX, NASDAQ
NYSE, AMEX, NASDAQ
Market
Market
Market
Market
Market
Market
700
100 largest
250
250
350
1,800
LSE
LSE
LSE
LSE
LSE
TSE
value
value
value
value
value
value
NASDAQ
NASDAQ
NASDAQ
NASDAQ
NASDAQ
Equal (geometric mean) 1,499
NYSE, AMEX, NASDAQ
Equal
Equal
Equal
Equal (geometric mean)
177
19
1,695
30
NYSE, AMEX, NASDAQ
NYSE, AMEX, NASDAQ
NYSE, AMEX, NASDAQ
LSE
Market value
2,275
24 countries, 3 regions
(returns in $, £, ¥, DM, and local
currency)
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
119
120
Part 1: The Investment Background
E xh ib it 4 A.1 Summary of Stock Market Indexes (Continued)
Name of Index
Weighting
Number of Stocks
Source of Stocks
MSCI Indexes
Market value
1,375
Dow Jones World
Stock Index
Market value
2,200
Euromoney—First
Boston Global Stock
Index
Salomon-Russell
World Equity Index
Market value
—
19 countries, 3 international,
38 international industries
(returns in $ and local currency)
13 countries, 3 regions, 120
industry groups (returns in
$, £, ¥, DM, and local currency)
17 countries (returns in $ and
local currency)
Market value
Russell 1000 and S-R
PMI of 600 non-U.S.
stocks
22 countries (returns in $ and local
currency)
Copyright © 2018. Cengage. All rights reserved.
E xh ib it 4 A.2 Foreign Stock Market Indexes
Name of Index
Weighting
Number of Stocks
History of Index
ATX-index (Vienna)
Market value
All listed stocks
Swiss Market Index
Market value
18
Stockholm General Index
Market value
All listed stocks
Copenhagen Stock Exchange
Share Price Index
Oslo SE Composite Index
(Sweden)
Johannesburg Stock
Exchange Actuaries Index
Mexican Market Index
Market value
All traded stocks
Market value
25
Base year 1967,1991 began
including all stocks
(Value 100)
Base year 1988, stocks
selected from the Basle,
Geneva, and Zurich
Exchanges (Value 1500)
Base year 1979, continuously
updated (Value 100)
Share price is based on average price of the day
Base year 1972 (Value 100)
Market value
146
Base year 1959 (Value
Market value
Variable number, based
on capitalization and
liquidity
Variable number, based
on capitalization and
liquidity
20
92
Base year 1978, high dollar
returns in recent years
Milan Stock Exchange
MIB Market
Market value
Belgium BEL-20 Stock Index
Madrid General Stock Index
Market value
Market value
Hang Seng Index (Hong Kong) Market value
33
FT-Actuaries World Indexes
FT-SE 100 Index (London)
CAC General Share Index
(French)
Singapore Straits Times
Industrial Index
Market value
Market value
Market value
2,275
100
212
Unweighted
30
100)
Change base at beginning of
each year (Value 1000)
Base year 1991 (Value 1000)
Change base at beginning of
each year
Started in 1969, accounts for
75 percent of total market
Base year 1986
Base year 1983 (Value 1000)
Base year 1981 (Value 100)
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
Chapter 4: Security Market Indexes and Index Funds
121
E x h ib it 4 A.2 Foreign Stock Market Indexes (Continued)
Name of Index
Weighting
Number of Stocks
History of Index
German Stock Market Index
(DAX)
Frankfurter Allgemeine
Zeitung Index (FAZ)
(German)
Market value
30
Base year 1987 (Value
1000)
Market value
100
Base year 1958 (Value
100)
Australian Stock Exchange
Share Price Indexes
Dublin ISEQ Index
HEX Index (Helsinki)
Market value
250
Introduced in 1979
Market value
Market value
Base year 1988 (Value 1000)
Base changes every day
Jakarta Stock Exchange
(Indonesia)
Taiwan Stock Exchange
Index
TSE 300 Composite Index
(Toronto)
KOSPI (Korean Composite
Stock Price Index)
Market value
All stocks traded
Varies with different
indexes
All listed shares
Base year 1982 (Value
100)
Market value
All listed stocks
Base year 1966 (Value
100)
Market value
300
Base year 1975 (Value
1000)
Market value (adjusted
for cross-holdings)
All listed stocks
Base year 1980 (Value
100)
Copyright © 2018. Cengage. All rights reserved.
Source: Compiled by authors.
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.
Copyright © 2018. Cengage. All rights reserved.
Reilly, Frank, et al. Investment Analysis and Portfolio Management, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5723274.
Created from aut on 2022-05-20 02:32:12.