1、,Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Seventh Edition by Frank K. Reilly & Keith C. Brown,Chapter 5,Chapter 5 Security-Market Indicator Series,Questions to be answered: What are some major uses of security-market indicator series (indexes)? What are
2、 the major characteristics that cause alternative indexes to differ? What are the major stock-market indexes in the United States and globally and what are their characteristics?,Chapter 5 Security-Market Indicator Series,What are the major bond-market indexes for the United States and the world? Wh
3、at are some of the composite stock-bond market indexes? Where can you get historical and current data for all these indexes? What is the short-run relationship among many of these indexes in the short run (monthly)?,Uses of Security-Market Indexes,As benchmarks to evaluate the performance of profess
4、ional money managers To create and monitor an index fund To measure market rates of return in economic studies For predicting future market movements by technicians As a substitute for the market portfolio of risky assets when calculating the systematic risk of an asset,Differentiating Factors in Co
5、nstructing Market Indexes,The sample size breadth source,Differentiating Factors in Constructing Market Indexes,Weighting of sample members price-weighted series value-weighted series unweighted (equally weighted) series,Differentiating Factors in Constructing Market Indexes,Computational procedure
6、arithmetic average compute an index and have all changes, whether in price or value, reported in terms of the basic index geometric average,Stock-Market Indicator Series,Price Weighted Series Dow Jones Industrial Average (DJIA) Nikkei-Dow Jones Average Value-Weighted Series NYSE Composite S&P 500 In
7、dex and more Unweighted Price Indicator Series Value Line Averages Financial Times Ordinary Share Index,Dow Jones Industrial Average (DJIA),Best-known, oldest, most popular series Price-weighted average of thirty large well-known industrial stocks, leaders in their industry, and listed on NYSE Total
8、 the current price of the 30 stocks and divide by a divisor (adjusted for stock splits and changes in the sample),Example of Change in DJIA Divisor When a Sample Stock Splits,After Three-for OneBefore Split Split by Stock APrices Prices A 30 10 B 20 20 C 10 1060 3 = 20 40 X = 20 X = 2 (New Divisor),
9、Exhibit 5.1,Demonstration of the Impact of Differently Priced Shares on a Price-Weighted Indicator Series,PERIOD T+ 1 . Period T Case A Case B A 100 110 100 B 50 50 50 C 30 30 33 Sum 180 190 183 Divisor 3 3 3 Average 60 63.3 61 Percentage Change 5.5% 1.7%,Exhibit 5.2,Criticism of the DJIA,Limited to
10、 30 non-randomly selected blue-chip stocks Does not represent a vast majority of stocks The divisor needs to be adjusted every time one of the companies in the index has a stock split Introduces a downward bias by reducing weighting of fastest growing companies whose stock splits,Nikkei-Dow Jones Av
11、erage,Arithmetic average of prices for 225 stocks on the First Section of the Tokyo Stock Exchange (TSE) Best-known series in Japan Price-weighted series formulated by Dow Jones and Company The 225 stocks represent 15 percent of all stocks on the First Section,Value-Weighted Series,Derive the initia
12、l total market value of all stocks used in the series Market Value = Number of Shares Outstanding X Current Market Price Assign an beginning index value (100) and new market values are compared to the base index Automatic adjustment for splits Weighting depends on market value,Value-Weighted Series,
13、where:Indext = index value on day tPt = ending prices for stocks on day tQt = number of outstanding shares on day tPb = ending price for stocks on base dayQb = number of outstanding shares on base day,Unweighted Price Indicator Series,All stocks carry equal weight regardless of price or market value
14、 May be used by individuals who randomly select stocks and invest the same dollar amount in each stock Some use arithmetic average of the percent price changes for the stocks in the index,Unweighted Price Indicator Series,Value Line and the Financial Times Ordinary Share Index compute a geometric me
15、an of the holding period returns and derive the holding period yield from this calculation,Global Equity Indexes,There are stock-market indexes available for most individual foreign markets These are closely followed within each country These are difficult to compare due to differences in sample sel
16、ection, weighting, or computational procedure Groups have computed country indexes,FT/S&P-Actuaries World Indexes,Jointly compiled by The Financial Times Limited, Goldman Sachs & Company, and Standard & Poors in conjunction with the Institute of Actuaries and the Faculty of Actuaries Measures 2,271
17、securities in 30 countries Covers 70% of the total value of all listed companies in each country,FT/S&P-Actuaries World Indexes,Includes actively traded medium and small corporations along with major international equities Securities included must allow direct holdings of shares by foreign nationals
18、 Index is market-value weighted with a base date of December 31, 1986 = 100,FT/S&P-Actuaries World Indexes,Index results are reported in U.S. dollars, U.K. pound sterling, Japanese yen, German mark, and the local currency of the country included Results are calculated daily after the New York market
19、s close and published the following day in the Financial Times Geographic subgroups are also published,Morgan Stanley Capital International (MSCI) Indexes,Three international, nineteen national, and thirty-eight international industry indexes Include 1,375 companies listed on stock exchanges in 19 c
20、ountries with a combined capitalization representing approximately 60 percent of the aggregate market value of the stock exchanges of these countries,Morgan Stanley Capital International (MSCI) Indexes,All the indexes are market-value weighted Reporting is in U.S. dollars and the countrys local curr
21、ency Also provides price to book value (P/BV) ratio price to cash earnings (earnings plus depreciation) (P/CE) ratio price to earnings (P/E) ratio dividend yield (YLD),Morgan Stanley Capital International (MSCI) Indexes,The Morgan Stanley group index for Europe, Australia, and the Far East (EAFE) is
22、 used as the basis for futures and options contracts on the Chicago Mercantile Exchange and the Chicago Board Options Exchange,Dow Jones World Stock Index,Introduced in January 1993 2,200 companies worldwide Organized into 120 industry groups Includes 33 countries representing more than 80 percent o
23、f the combined capitalization of these countries Countries are grouped into three major regions:Asia/Pacific, Europe/Africa, and the Americas Each countrys index is calculated in its own currency as well as in the U.S. dollar,Comparison of World Stock Indexes,Correlations between the three series si
24、nce December 31, 1991 to December 31, 2000, indicates an average correlation coefficient among them in excess of 0.99,Bond-Market Indicator Series,Relatively new and not widely published Growth in fixed-income mutual funds increase need for reliable benchmarks for evaluating performance Many manager
25、s have not matched aggregate bond market return increasing interest in bond index funds requires an index to emulate,Difficulties in Creating and Computing Bond-Market Indicator Series,Universe of bonds is much broader than that of stocks Range of bond quality varies from U.S. Treasury securities to
26、 bonds in default Bond market changes constantly with new issues, maturities, calls, and sinking funds Bond prices are affected by duration, which is dependent on maturity, coupon, and market yield Correctly pricing individual bond issues without current and continuous transaction prices available p
27、oses significant problems,Investment-Grade Bond Indexes,Four investment firms maintain indexes for Treasury bonds and other investment grade (rated BBB or higher) bonds Relationship among these bonds is strong (correlations average 0.95) Returns for all these bonds are driven by aggregate interest r
28、ates - shifts in the government yield curve,High-Yield Bond Indexes,Non investment-grade bonds rated BB, B, CCC, CC, C Four investment firms and two academicians created indexes Relationship among alternative high-yield bond indexes is weaker than among investment grade indexes Merrill Lynch Convert
29、ible Securities Indexes,Global Government Bond Market Indexes,Global bond market dominated by government issues Several indexes created by major investment firms Measure total rates of return Use market-value weighting Use trader pricing But sample sizes differ as do numbers of countries included,Gl
30、obal Government Bond Market Indexes,Differences affect long-term risk-return performance Low correlation among several countries is similar to stocks Significant exchange rate effect on volatility and correlations,Composite Stock-Bond Indexes,Beyond separate stock indexes and bond indexes for indivi
31、dual countries, a natural step is a composite series that measures the performance of all securities in a given country This allows examination of benefits of diversification with a combination of asset classes such as stocks and bonds in addition to diversifying within the asset classes of stocks o
32、r bonds,Merrill Lynch-Wilshire U.S. Capital Markets Index (ML-WCMI),Market-value weighted index measures total return performance of the combined U.S. taxable fixed income and equity markets Combination of Merrill-Lynch fixed-income indexes and the Wilshire 5000 common-stock index Tracks over 10,000
33、 stocks and bonds,Brinson Partners Global Security Market Index (GSMI),Includes: U.S. stocks and bonds Non-U.S. equities Non-dollar bonds Allocation to cash Matches a typical U.S. pension fund allocation policy Close to the theoretical “market portfolio of risky assets” referred to in the CAPM liter
34、ature,Comparison of Indexes Over Time,Correlations among monthly equity price changes Most differences are attributable to sample differences Different segments of U.S. stock market or from different countries Lower correlations between NYSE series and AMEX series or NASDAQ index than between NYSE a
35、lternative series (S&P 500 and NYSE composite),Comparison of Indexes Over Time,Correlations among monthly bond indexes Among investment-grade bonds correlations range from 0.90 to 0.99 Interest rates differ by risk premiums Rates of return are determined by systematic interest rate variables Low cor
36、relation in global returns to U.S. returns support global diversification,Mean Annual Security Risk-Returns and Correlations,There are clear differences among the series due to different asset classes (e.g., stocks versus bonds) and when there are different samples within asset classes There is a po
37、sitive relationship between the average rate of return on an asset and its measure of risk,Mean Annual Security Risk-Returns and Correlations,The security market indexes can be used to measure the historical performance of an asset class as benchmarks to evaluate the performance of a money manager f
38、or a mutual fund, a personal trust, or a pension plan,The Internet Investments Online, .au www.bolsamadrid.es www.nikko.co.jp:80/SEC/index_e.html www.exchange.de/realtime/dax_d.html,Future topics Chapter 6,Sources of Information on Global Investments Aggregate Economic Analysis Aggregate Security-Market Analysis Industry Analysis Individual Stock and Bond Analysis Mutual Funds,
