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Chapter 5
Computational procedure
arithmetic average indexed geometric average
Value-Weighted Series
NYSE Composite S&P 500 Index AMEX Index and more.
Unweighted Index
Value Line Financial Times Ordinary Share Index
Example of Change in DJIA Divisor When a Sample Stock Splits After Three-for One Before Split Split by Stock A Prices Prices 10 10 15 15 20 10 45 3 = 15 35 X = 15 X = 2.33 (New Divisor)
A B C
Price-weighted series
Stock split results in less weighting for sample stock Introduces a downward bias in DJIA by reducing weighting of fastest growing companies whose stock splits
Value-Weighted Series
Derive the initial total market value of all stocks used in the series
Market Value = Number of Shares Outstanding x Current Market Price
Assign a beginning index value (100) New market values are compared to the base index Automatic adjustment for splits Weighting depends on market value
40 100 60 200 Let this $200 million have an index value of 100.
All the indexes are market-value weighted Reporting is in U.S. dollars and the countrys local currency
The Morgan Stanley group index for Europe, Australia, and the Far East (EAFE) is used as the basis for futures and options contracts
Global Government Bond Market Indexes: Analysis of Performance Differences affect long-term risk-return performance Low correlation among several countries is similar to stocks Significant exchange rate effect on volatility and correlations
Matches a typical U.S. pension fund allocation policy Close to the theoretical market portfolio of risky assets referred to in CAPM
Lower correlations between NYSE series and AMEX series or NASDAQ index than between NYSE alternative series (S&P 500 and NYSE composite)
Low correlation between Japanese market with alternative U.S. stock-market indexes.
Japan could be a prime source of diversification