Stock Market Indexes 2010

8/9/2019 Stock Market Indexes 2010

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Stock Market IndexesStock Market Indexes

If we want to know how the stockmarket did today, what should we

look at?

The Dow Jones Industrial

Average? The S! "## Index? The $asda% &om'osite Index?

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(hat (e $eed to )now to(hat (e $eed to )now to*nderstand an Index*nderstand an Index The num+er of stocks in the

index

The ty'es of stocks in the index

The weighting method used tocalculate the index value

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!rice (eighting!rice (eighting

Start +y calculating the average 'rice-arithmetic

mean. of the stocks in the index at time

t

$

Index valuet / ∑ !i,t divided +y $

i / 0

where the stocks in the index at time t go from 0 1 $

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!rice (eighting2 An!rice (eighting2 An

3xam'le3xam'le Price Price

Stock Day 1 Day 2 Shrs

Out. A 40## 400# 0##,###

5 4 0# 4 0# 0,###,###

$ote that the market ca' of each stockis 40# million on Day 0

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!rice (eighting2 An!rice (eighting2 An

3xam'le3xam'leIndex 6alue0 / -0## 7 0#.89 / ""Index 6alue9 / -00# 7 0#.89 / :#

; &hange Index / -:# < "".8"" /=0;

A 0#; increase in the 'rice of stockA caused a =0; increase in theindex

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(hat if Instead(hat if Instead

Price Price

Stock Day 1 Day 2 SharesOut.

A 40## 40##0##,###

5 4 0# 4 000,###,###

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3xam'le -cont.3xam'le -cont.

Index 6alue0 / -0## 7 0#.89 / ""

Index 6alue9 / -0## 7 00.89 / """

; &hange in Index / -""" < "".8""/ =0;

A 0#; increase in the 'rice of stock5 caused a #=0; increase in theindex

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!rice (eighting!rice (eightingStock A>s !rice is 0# times higher so

it gets a 0# times larger weighting

5ut +oth com'anies are the samesie

Stock 'rices can +e altered +ychanging shares outstandingthrough s'lits and re'urchases

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!rice (eighting2 Another!rice (eighting2 Another3xam'le3xam'le Price Price

Stock Day 1 Day 2 SharesOut

A 40## 4 "" 9##,###

5 4 0# 4 0# 0,###,###

!rice of Stock A goes u' to 400# on day 9,

and at the close of trading, it has a 9


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!rice (eighting Index!rice (eighting Index

Index 6alue0 / -0## 7 0#.89 / ""

Index 6alue9 / -"" 7 0#.89 / @9"

; &hange / -@9" < "".8"" / < #=;

The index is down, +ut stock Agained 0#; and stock 5 wasunchanged

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The Solution2 AdBust the The Solution2 AdBust the

DivisorDivisorAdjust the Divisor so that the indexgives us the value it would have hadwithout the split:

5efore the S'lit, the index would have +een2

00# 7 0# / 09# and 09#89 / !

After the S'lit, sum of 'rices Day 9 / "" 70#/ :" :"8-adBusted divisor. / :#

AdBusted Divisor / 0#C@@@@

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The AdBusted Divisor The AdBusted Divisor

rom now on, we need to add the 'rices of thestocks in the index and divide +y the adBusteddivisor to get the index value

(e continue to use this adBusted divisor untilanother stock s'lits, or until one of the stocksin the index is re'laced, or if there is a s'ins 'rice

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!rice (eighting!rice (eighting

Do any maBor indexes use a !rice(eighting System?

Fes

The Dow Jones IndustrialAverage does

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DJIA2 GistoryDJIA2 Gistory

htt'288wwwdBindexescom8mdsidx8?event/showAverages

Hldest +arometer of the stockmarket!rice (eighted IndexStarted in 0C=: +y &harles Dow

with 09 stocks -Ge and Jonesstarted Dow Jones &om'any.3 is the only original stock still in

the index 14

http://www.djindexes.com/mdsidx/?event=showAverageshttp://www.djindexes.com/mdsidx/?event=showAverageshttp://www.djindexes.com/mdsidx/?event=showAverageshttp://www.djindexes.com/mdsidx/?event=showAverages


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DJIA2 &om'ositionDJIA2 &om'osition

Today, there are @# &om'anies

e'resent a+out @#; of the

market value of *S Stocks

9K stocks trade on the $FS3@ stocks -MST, I$T&, and &S&H.

trade on $ASDAL

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As of Jan 0, 9#0#2@M, Alcoa, American 3x'ress, ATT,

5ank of America,5oeing, &ater'illar,

&hevron, &isco, &oca


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Gow are the rms in the indexselected?

3ditors of the Dow Jones


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Hther Dow JonesHther Dow Jones!rice (eighted Indexes!rice (eighted Indexes

Trans'ortation -9# rms.

*tilities -0" rms.

&om'osite -:" rms.

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DJIA2 Index 6alueDJIA2 Index 6alue

Su''ose the Dow closes at0#,"C="#

Gow did they arrive at this value?

@#

∑ !i,t

i / 0

DJIA Indext /


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Market &a' (eightedMarket &a' (eighted

IndexesIndexes Market &a'italiation / Market

6alue

D"#$%$&$O%:

Nshares outstanding O !rice 'erShare

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Index 6alueIndex 6alue tt n

∑ -! i,t . x -NHut Shrsi,t .

i / 0

Indext /


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Index 6alueIndex 6alue tt

t indexes days+ is the +ase dayi indexes stocks

5ase day value needs to +ear+itrarily set to something +y

the rm starting the index 0# or0## are common

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5ack to 3xam'le2 &ase 05ack to 3xam'le2 &ase 0

Price Price

Stock Day 1 Day 2 SharesOut.

A 40## 400# 0##,### 5 4 0# 4 0# 0,###,###

Again, note that each stock has thesame market value on day 0

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Market 6alue 3xam'le 1Market 6alue 3xam'le 1

Day 0Day 0Index 6alue0 /

-0##.-0##,###. 7 -0#.-0,###,###.


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Market 6alue 3xam'le 1Market 6alue 3xam'le 1

Day 9Day 9Index 6alue9 /

-00#.-0##,###. 7 -0#.-0,###,###.


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Market 6alue 3xam'leMarket 6alue 3xam'le

; &hange /-0#" < 0##.80## / "#;

$HT32 a0#; increase in Stock Acaused a

"; increase in the index

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(hat if InsteadP&ase 9(hat if InsteadP&ase 9

Price Price SharesStock Day 1 Day 2Outstanding

A 40## 40## 0##,### 5 4 0# 4 00 0,###,###

Instead of stock A going u' +y 0#;,stock 5 does

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3xam'le -cont.3xam'le -cont.

Index 6alue9 /

-0##.-0##,###. 7 -00.-0,###,###.


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(hat if a stock s'lits?(hat if a stock s'lits?

Price Price Stock Day 1 Day 2 ShrsOut

A 40## 4 ""9##,###

5 4 0# 4 0#0,###,###

Stock A goes u' to 400# and then hasa 9


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Index 6alue9 /

-"".-9##,###. 7 -0#.-0,###,###.


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; &hange /-0#" < 0##.80## / "#;

Since stocks A and 5 have thesame market value, they receivethe same weight in the index

(hat indexes use this weightingsystem?

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S! "##S! "##

htt'288www9standardand'oorscom8'ortal8site8s'8en8us8'ageto'ic8indicesQ"##89,@,9,9,#,#,#,#,#,9,0,#,#,#,#,#html

Most famous market


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S! "##S! "##

0=9C was S! =# In 0="K it+ecame S! "##

Is used +y =K; of *S moneymanagers and 'ension 'lans'onsors as a 'roxy for the *S

stock market

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S! "##S! "##

Stocks are selected to includeleading com'anies in leadingindustries in the *S*S rms only, though some non<

*S rms are grandfathered intothe index&hanges are made every cou'le of

weeks or soStandard and !oors -a division ofMcraw


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Hther M6 (eightedHther M6 (eighted

IndexesIndexes

%'S" (o)posite2 All $FS3stocks

%ASDA* (o)posite2 All stockslisted on $ASDAL -oughly @,###stocks.

+ilshire ,!!!: All stocks tradedin the *nited States

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IndexesIndexes

(ilshire "##2 (ilshire "###stocks with the S! "## stocks

removed

S! ##2 A mid


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IndexesIndexes-ussell $ndexes: *S Stocks from

$FS3, AM3O, and $asda%

htt'288wwwrussellcom8indexes

-ussell !!!2 @### largest *S rms

-ussell 2!!!2 9### smallest of ussell@###

-ussell 1!!!2 0### largest of ussell@###

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http://www.russell.com/indexeshttp://www.russell.com/indexes


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International IndexesInternational Indexes

$nternational "/uity $ndexes2MS&I (orld Index2

Maintained +y Morgan Stanley

0"## stocks from 9@ countries

Hnly com'anies from develo'ed countriesUmarket value weightedlo+al Dow2 0"# stocksU +oth develo'ed

and emerging countries -+ut #; from*S.U unweighted

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*nweighted Indexes*nweighted Indexes

3ach stock receives the sameweight

Indexes done either witharithmetic or geometric averages

of ; changes in stock 'rices

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5ack to 3xam'le2 &ase 05ack to 3xam'le2 &ase 0

Price PriceStock Day 1 Day 2Shares Out.

A 40## 400#0##,###

5 4 0# 4 0#

0,###,###

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3xam'le3xam'le

Stock A increased 0#; in 'riceand Stock 5 had a 'rice changeof #;

Assume a starting index value of0## on day 0, so Index 6alue0 /

0##

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3xam'le3xam'le

0sing Arith)etic ean2Average ; &hange / -0#7#.89 /

";

Since the stocks in the index wentu' +y an average of ";, the indexmust go u' +y ";

Index 6alue9 / 0## O 0#" / 0#"

*sed in academic studies

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3xam'le3xam'le

0sing eo)etric ean2Average ; &hange

V-00#.-0#.W089 < 0 / CC;

Index 6alue9 / 0## O 0#CC /

0#CC

*sed +y 6alue Xine

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Index und ormationIndex und ormation

Price +eighted: 3%ual num+erof shares of each stock

arket 3alue +eighted2 Investin 'ro'ortion to marketca'italiation

0nweighted2 3%ual dollaramount in each stock

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$)plications o4$)plications o4

SkewnessSkewnessSu''ose there are only stocks in our

world2

(, O, F Y

W has a 300% return

X has a 25% return

Y has a 5% return

Z has a - 20% return

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SkewnessSkewness(hat if you invested the same amount of

money in each stock?

!ortfolio eturn2

9"-@##;. 7 9"-9";. 7 9"-";. 7 9"-


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SkewnessSkewness Many indexes have skewed returns Often get a narrow arket!

"trong returns for an index ay #e $riari%y due to one or two industries

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SkewnessSkewness &or any $ri'e(weighted or va%ue(weighted

index) as a sto'k*s $ri'e goes u$ +re%ative toother sto'ks, it re'eives a higher weighting inthe index!

-his eans that if there is a .#u##%e/ in onese'tor) the index wi%% ti%t ore heavi%y towardthe sto'ks in that se'tor!&or those who invest in the index) it eans

$%a'ing a greater weight on those sto'ks whi'hhave gone u$ in $ri'e the ost!s that good or #ad

Stock Market Indexes 2010

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