EQUITY INVESTMENTS: EQUITY: MARKET ORGANIZATION,

MARKET INDICES, AND MARKET EFFICIENCY

SECURITY MARKET INDICES

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OR WARRANT THE ACCURACY OF THE PREPARATORY
SOURCES OFFERED BY LOMONOSOV MOSCOW STATE
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CLAIMED BY LOMONOSOV MOSCOW STATE UNIVERSITY.

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 WHAT IS A SECURITY MARKET INDEX?

Security market index – used to represent the performance of an asset class,

security market or segment of a market. Usually it’s created as portfolio of
securities which are referred as constituents of the index.

An index has a numerical value which is calculated from the market prices.

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 WHAT IS AN INDEX’ RETURN?

Total return = Price Return + Dividends

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 HOW TO CONSTRUCT AND MAINTAIN AND INDEX?

1. What is the target market?

2. Which securities to include?

3. What the weights should be?

4. How often should the index be rebalanced?

5. When should the selection be re-examined?

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 HOW TO WEIGHT SECURITIES IN AN INDEX?

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 VALUE AND RETURN CALCULATIONS

price-weighted index = (sum of all stock prices ) / (number of stock in index

adjusted for splits)

current index value = (current total market value of index stocks) / (base year total
market value of index stocks) * base year index value

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 MAINTENANCE OF AN INDEX

Rebalancing – adjusting the weights to their target numbers. Usually done

quarterly.

Reconstitution – periodically adding or deleting securities that make up an index (to

reflect corporate events such as bankruptcies, delisting and so on).

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 FEATURES OF MARKET INDICES

 Reflection of market sentiment

 Benchmark of manager performance
 Measure of market return and risk
 Measure of beta and risk-adjusted return
 Model portfolio for index funds

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 WHAT MAY BE DESCRIBED BY AN INDEX: EQUITY EXAMPLES

 Broad market index (Wilshire 5000)

 Multi-market index (MSCI World)
 Multi-market with fundamental weighting
 Sector index
 Style Index

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 WHAT MAY BE DESCRIBED BY AN INDEX: FIXED-INCOME EXAMPLES

 Country (Bloomberg Barclays US Aggregate Index, Euro C-Bonds Turkey)

 Investment rating (Bloomberg Barclays US Corporate High-Yield, C-Bonds-CBI RU
BB)

 Duration (C-bonds-CBI RU 3-5Y)

 Sector index (S&P 500 Health Care Corporate Bond Index)

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 ALTERNATIVE INVESTMENTS INDICES

 Commodities (S&P GSCI) – based on basket of futures

 Real-estate (DJRE, MSCI US REIT)
 Hedge-fund (HFRI Macro Index, HFRI Emerging Markets)

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 HOMEWORK ASSIGNMENT
READING
CFA® Level I Curriculum (2019) Volume V  Reading 45

PRACTICE PROBLEMS
CFA® Level I Curriculum (2019) Volume V  Reading 45  Practice Problems
MOODLE  CFA® Level I 2019  TESTS  Equity #2

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