Security & Portfolio

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  • Topic: Stock market index, Stock market, Dow Jones Industrial Average
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  • Published : March 18, 2013
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CHAPTER 7

SECURITY-MARKET INDICATOR SERIES

Uses of Security Market Indexes

Benchmark to Judge Performance of Individual Portfolios Develop an Index Portfolio
Examine Factors That Influence the Stock Market
Technical Analysis of the Market
Derivation of Systematic Risk for Securities

Differentiating Factors in Constructing Market Indexes

The Sample: Size, Breadth, and Source
Weighting of Sample Members:
price-weighted, value-weighted, unweighted
Computational Procedures

Stock-Market Indicator Series

Price Weighted Series
Dow Jones Industrial Average (30 stock average)
Nikkei-Dow Jones Average (Nikkei Stock Average Index)

Value Weighted Series
Standard and Poor's Indexes
New York Stock Exchange Index
NASDAQ Series
American Stock Exchange Market Value Index
Wilshire 5000 Equity Index
Russell Indexes
Financial Times Actuaries Indexes
Tokyo Stock Exchange Price Index
FT-Actuaries World Indexes
Morgan Stanley Capital International Indexes
Dow Jones World Stock Index
Euromoney-First Boston Global Stock Index
Salomon-Russell World Equity Index

Unweighted Price Indicator Series
Value Line Averages
Financial Times Ordinary Share Index
Style Indexes

Global Equity Indexes
FT/S&P - Actuaries World Indexes
Morgan Stanley Capital International (MSCI) Indexes
Dow Jones World Stock Index
Comparison of World Stock Indexes

Bond-Market Indicator Series

Investment-Grade Bond Indexes
Lehman Brothers
Merrill Lynch
Ryan Treasury
Salomon Brothers

High-Yield Bond Indexes
U.S. High-Yield Bond Indexes
Merrill Lynch Convertible Securities Indexes

Global Government Bond Market Indexes

Composite Stock-Bond Indexes

Merrill Lynch-Wilshire U.S. Capital Markets Index (ML-WCMI)
Brinson Partners Global Security Market Index (GSMI)

Comparison of Indexes Over Time

Correlations Among Monthly Equity Price Changes
Correlations Among Monthly Bond Series
Mean Annual Stock Price Changes

CHAPTER 7

Answers to Questions

1. The purpose of market indicator series is to provide a general indication of the aggregate market changes or market movements. More specifically, the indicator series are used to derive market returns for a period of interest and then used as a benchmark for evaluating the performance of alternative portfolios. A second use is in examining the factors that influence aggregate stock price movements by forming relationships between market (series) movements and changes in the relevant variables in order to illustrate how these variables influence market movements. A further use is by technicians who use past aggregate market movements to predict future price patterns. Finally, a very important use is in portfolio theory, where the systematic risk of an individual security is determined by the relationship of the rates of return for the individual security to rates of return for a market portfolio of risky assets. Here, a representative market indicator series is used as a proxy for the market portfolio of risky assets.

2. A characteristic that differentiates alternative market indicator series is the sample--the size of the sample (how representative of the total market it is) and the source (whether securities are of a particular type or a given segment of the population (NYSE, TSE). The weight given to each member plays a discriminatory role--with diverse members in a sample, it would make a difference whether the series is price-weighted, value-weighted, or unweighted. Finally, the computational procedure used for calculating return--i.e., whether arithmetic mean, geometric mean, etc.

3. A price-weighted series is an unweighted arithmetic average of current prices of the securities included in the sample--i.e., closing prices of all securities are summed and divided by the...
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