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Lecture Presentation Software

to accompany

Investment Analysis and Portfolio Management


Si"th E#ition $y

%rank &. '(illy ) &(ith *. +ro,n

Chapter 5
Saif Ullah Economist_of_Pakistan@Yahoogroups.com Saifullah271@yahoo.com +92 21!! 271

Chapter 5 Security-Market Indicator Series


Questions to be answered: What are some major uses of security-market indicator series (indexes)? What are the major characteristics that cause alternative indexes to differ? What are the major stock-market indexes in the United tates and !lobally and what are their characteristics?

Chapter 5 Security-Market Indicator Series


What are the major bond-market indexes for the United tates and the world? What are some of the com"osite stock-bond market indexes? Where can you !et historical and current data for all these indexes? What is the short-run relationshi" amon! many of these indexes in the short run (monthly)?

Uses of ecurity-#arket $ndexes


Be chma!" #o $u%&e 'o!#folio 'e!fo!ma ce
( )*e +u!e #o a aly,e %iffe!e #ial !i+"-

.e/elo' a i %e0 'o!#folio


( I %e0 fu %+ 1 ma#ch ma!"e# 'e!fo!ma ce

20ami e fac#o!+ #ha# i flue ce a&&!e&a#e +ecu!i#y '!ice mo/eme #

Uses of ecurity-#arket $ndexes


3ech icia + *elie/e 'a+# +#oc" cha &e+ ca *e u+e% #o '!e%ic# fu#u!e '!ice mo/eme # 3o com'u#e +y+#ema#ic !i+" of a a++e#

%ifferentiatin! &actors in 'onstructin! #arket $ndexes

3he +am'le
+i,e *!ea%#h +ou!ce

%ifferentiatin! &actors in 'onstructin! #arket $ndexes

4ei&h#i & +am'le mem*e!+


( '!ice15ei&h#e% +e!ie+ ( /alue15ei&h#e% +e!ie+ ( u 5ei&h#e% )e6ually 5ei&h#e%- +e!ie+

%ifferentiatin! &actors in 'onstructin! #arket $ndexes

7om'u#a#io al '!oce%u!e
( a!i#hme#ic a/e!a&e ( i %e0e% ( &eome#!ic a/e!a&e

tock-#arket $ndicator eries


.o5 8o e+ I %u+#!ial A/e!a&e ).8IA9:S2 7om'o+i#e S;< =>> I %e0 A?2@ I %e0 9i""ei A/e!a&e a % mo!eA.

.o5 8o e+ I %u+#!ial A/e!a&e ).8IA Be+#1" o5 , ol%e+#, mo+# 'o'ula! +e!ie+ <!ice15ei&h#e% a/e!a&e of #hi!#y la!&e 5ell1 " o5 i %u+#!ial +#oc"+, lea%e!+ i #hei! i %u+#!y, a % li+#e% o 9:S2 3o#al #he cu!!e # '!ice of #he 3> +#oc"+ a % %i/i%e *y a %i/i+o! )a%$u+#e% fo! +#oc" +'li#+ a % cha &e+ i #he +am'le-

20am'le of 7ha &e i .8IA .i/i+o! 4he a Sam'le S#oc" S'li#+

Af#e! 3h!ee1fo! B e -a$l( ..1 Befo!e S'li# S'li# *y S#oc" A <!ice+ <!ice+ A 3> 1> B 2> 2> 7 1> 1> 6> 3 C 2> D> @ C 2> @ C 2 )9e5 .i/i+o!-

.emo +#!a#io of #he Im'ac# of .iffe!e #ly <!ice% Sha!e+ o a <!ice14ei&h#e% -a$l( ..2 I %ica#o! Se!ie+
<e!io% 3 A 1>> B => 7 3> Sum 1F> .i/i+o! 3 A/e!a&e 6> <e!ce #a&e 7ha &e <2EIB. 3+ 1 7a+e A 7a+e B 11> 1>> => => 3> 33 19> 1F3 3 3 63.3 61 =.=G 1.7G
.

7!i#ici+m of #he .8IA


Sam'le u+e% i+ limi#e%
( 3> o 1!a %omly +elec#e% *lue1chi' +#oc"+ a!e o# !e'!e+e #a#i/e of #he 1F>> 9:S2 li+#e% +#oc"+

<!ice15ei&h#e% +e!ie+
( S#oc" +'li# !e+ul#+ i le++ 5ei&h#i & fo! +am'le +#oc" ( I #!o%uce+ a %o5 5a!% *ia+ i .8IA *y !e%uci & 5ei&h#i & of fa+#e+# &!o5i & com'a ie+ 5ho+e +#oc" +'li#+

9i""ei1.o5 8o e+ A/e!a&e
A!i#hme#ic a/e!a&e of '!ice+ fo! 22= +#oc"+ o #he Fi!+# Sec#io of #he 3o"yo S#oc" 20cha &e )3S2 Be+#1" o5 +e!ie+ i 8a'a <!ice15ei&h#e% +e!ie+ fo!mula#e% *y .o5 8o e+ a % 7om'a y 3he 22= +#oc"+ !e'!e+e # 1= 'e!ce # of all +#oc"+ o #he Fi!+# Sec#io

Halue14ei&h#e% Se!ie+
.e!i/e #he i i#ial #o#al ma!"e# /alue of all +#oc"+ u+e% i #he +e!ie+
#arket (alue ) *umber of hares +utstandin! , 'urrent #arket -rice

A++i& a *e&i i & i %e0 /alue )1>>- a % e5 ma!"e# /alue+ a!e com'a!e% #o #he *a+e i %e0 Au#oma#ic a%$u+#me # fo! +'li#+ 4ei&h#i & %e'e %+ o ma!"e# /alue

Halue14ei&h#e% Se!ie+
I %e0 # PQ = P Q
t b t b

Be&i

i & I %e0 Halue

5he!eI I %e0t C i %e0 /alue o %ay t <t C e %i & '!ice+ fo! +#oc"+ o %ay t Jt C um*e! of ou#+#a %i & +ha!e+ o %ay t <* C e %i & '!ice fo! +#oc"+ o *a+e %ay J* C um*e! of ou#+#a %i & +ha!e+ o *a+e %ay

U 5ei&h#e% <!ice I %ica#o! Se!ie+


All +#oc"+ ca!!y e6ual 5ei&h# !e&a!%le++ of '!ice o! ma!"e# /alue ?ay *e u+e% *y i %i/i%ual+ 5ho !a %omly +elec# +#oc"+ a % i /e+# #he +ame %olla! amou # i each +#oc" Some u+e arithmetic avera!e of #he 'e!ce # '!ice cha &e+ fo! #he +#oc"+ i #he i %e0

U 5ei&h#e% <!ice I %ica#o! Se!ie+


Halue Li e a % #he Fi a cial 3ime+ B!%i a!y Sha!e I %e0 com'u#e a !eometric mean of #he hol%i & 'e!io% !e#u! + a % %e!i/e #he hol%i & 'e!io% yiel% f!om #hi+ calcula#io

Klo*al 26ui#y I %e0e+


3he!e a!e +#oc"1ma!"e# i %e0e+ a/aila*le fo! mo+# i %i/i%ual fo!ei& ma!"e#+ 3he+e a!e clo+ely follo5e% 5i#hi each cou #!y 3he+e a!e %ifficul# #o com'a!e %ue #o %iffe!e ce+ i +am'le +elec#io , 5ei&h#i &, o! com'u#a#io al '!oce%u!e K!ou'+ ha/e com'u#e% cou #!y i %e0e+

F3LS;<1Ac#ua!ie+ 4o!l% I %e0e+


8oi #ly com'ile% *y 3he Fi a cial 3ime+ Limi#e%, Kol%ma Sach+ ; 7om'a y, a % S#a %a!% ; <oo!M+ i co $u c#io 5i#h #he I +#i#u#e of Ac#ua!ie+ a % #he Facul#y of Ac#ua!ie+ ?ea+u!e+ 2,D61 +ecu!i#ie+ i 3> cou #!ie+ 7o/e!+ 7>G of #he #o#al /alue of all li+#e% com'a ie+ i each cou #!y

F3LS;<1Ac#ua!ie+ 4o!l% I %e0e+


I clu%e+ ac#i/ely #!a%e% me%ium a % +mall co!'o!a#io + alo & 5i#h ma$o! i #e! a#io al e6ui#ie+ Secu!i#ie+ i clu%e% mu+# allo5 %i!ec# hol%i &+ of +ha!e+ *y fo!ei& a#io al+ I %e0 i+ ma!"e#1/alue 5ei&h#e% 5i#h a *a+e %a#e of .ecem*e! 31, 19F6 C 1>>

F3LS;<1Ac#ua!ie+ 4o!l% I %e0e+


I %e0 !e+ul#+ a!e !e'o!#e% i U.S. %olla!+, U.N. 'ou % +#e!li &, 8a'a e+e ye , Ke!ma ma!", a % #he local cu!!e cy of #he cou #!y i clu%e% Ee+ul#+ a!e calcula#e% %aily af#e! #he 9e5 :o!" ma!"e#+ clo+e a % 'u*li+he% #he follo5i & %ay i #he Financial Times Keo&!a'hic +u*&!ou'+ a!e al+o 'u*li+he%

?o!&a S#a ley 7a'i#al I #e! a#io al )?S7I- I %e0e+


3h!ee i #e! a#io al, i e#ee a#io al, a % #hi!#y1ei&h# i #e! a#io al i %u+#!y i %e0e+ I clu%e 1,37= com'a ie+ li+#e% o +#oc" e0cha &e+ i 19 cou #!ie+ 5i#h a com*i e% ca'i#ali,a#io !e'!e+e #i & 6> 'e!ce # of #he a&&!e&a#e ma!"e# /alue of #he +#oc" e0cha &e+ of #he+e cou #!ie+

?o!&a S#a ley 7a'i#al I #e! a#io al )?S7I- I %e0e+


All #he i %e0e+ a!e ma!"e#1/alue 5ei&h#e% Ee'o!#i & i+ i U.S. %olla!+ a % #he cou #!yM+ local cu!!e cy Al+o '!o/i%e+
( '!ice #o *oo" /alue )<LBH- !a#io ( '!ice #o ca+h ea! i &+ )ea! i &+ 'lu+ %e'!ecia#io )<L72- !a#io ( '!ice #o ea! i &+ )<L2- !a#io ( %i/i%e % yiel% ):L.-

?o!&a S#a ley 7a'i#al I #e! a#io al )?S7I- I %e0e+


3he ?o!&a S#a ley &!ou' i %e0 fo! 2u!o'e, Au+#!alia, a % #he Fa! 2a+# )2AF2i+ u+e% a+ #he *a+i+ fo! fu#u!e+ a % o'#io + co #!ac#+

.o5 8o e+ 4o!l% S#oc" I %e0


I #!o%uce% i 8a ua!y 1993 2,2>> com'a ie+ 5o!l%5i%e B!&a i,e% i #o 12> i %u+#!y &!ou'+ I clu%e+ 33 cou #!ie+ 7ou #!ie+ a!e &!ou'e% i #o 3 !e&io +

.o5 8o e+ 4o!l% S#oc" I %e0


Ee'!e+e #+ o/e! F>G of #he com*i e% ca'i#ali,a#io of #he+e cou #!ie+ 7ou #!y i %e0e+ a!e com'u#e% i local cu!!e cy, U.S. %olla!+, B!i#i+h 'ou %, Ke!ma ma!", a % 8a'a e+e ye

7om'a!i+o of 4o!l% S#oc" I %e0e+


7o!!ela#io + *e#5ee #he #h!ee +e!ie+ +i ce .ecem*e! 31, 1991 i %ica#e #he !e+ul#+ 5i#h #he al#e! a#i/e 5o!l% +#oc" i %e0e+ a!e 6ui#e com'a!a*le U.S. .olla!+ F3 1 ?SI .99F F3 1 .8I .997 ?S 1 .8I .996

3a*le =.9

Bo %1?a!"e# I %ica#o! Se!ie+


Eela#i/ely e5 a % o# 5i%ely 'u*li+he% K!o5#h i fi0e%1i come mu#ual fu %+ i c!ea+e ee% fo! !elia*le *e chma!"+ fo! e/alua#i & 'e!fo!ma ce ?a y ma a&e!+ ha/e o# ma#che% a&&!e&a#e *o % ma!"e# !e#u!
( i c!ea+i & i #e!e+# i *o % i %e0 fu %+ ( !e6ui!e+ a i %e0 #o emula#e

.ifficul#ie+ i 7!ea#i & a % 7om'u#i & Bo %1?a!"e# I %ica#o! Se!ie+


Ea &e of *o % 6uali#y /a!ie+ f!om U.S. 3!ea+u!y +ecu!i#ie+ #o *o %+ i %efaul# Bo % ma!"e# cha &e+ co +#a #ly 5i#h e5 i++ue+, ma#u!i#ie+, call+, a % +i "i & fu %+ Bo % '!ice+ a!e affec#e% *y %u!a#io , 5hich i+ %e'e %e # o ma#u!i#y, cou'o , a % ma!"e# yiel% 7o!!ec#ly '!ici & i %i/i%ual *o % i++ue+ 5i#hou# cu!!e # a % co #i uou+ #!a +ac#io '!ice+ a/aila*le

I /e+#me #1K!a%e Bo % I %e0e+


Fou! i /e+#me # fi!m+ mai #ai i %e0e+ fo! 3!ea+u!y *o %+ a % o#he! i /e+#me # &!a%e )!a#e% BBB o! hi&he!- *o %+ Eela#io +hi' amo & #he+e *o %+ i+ +#!o & )co!!ela#io + a/e!a&e >.9= Ee#u! + fo! all #he+e *o %+ a!e %!i/e *y a&&!e&a#e i #e!e+# !a#e+ 1 +hif#+ i #he &o/e! me # yiel% cu!/e

Hi&h1:iel% Bo % I %e0e+
9o i /e+#me #1&!a%e *o %+
( !a#e% BB, B, 777, 77, 7

Fou! i /e+#me # fi!m+ a % #5o aca%emicia + c!ea#e% i %e0e+ Eela#io +hi' amo & al#e! a#i/e hi&h1yiel% *o % i %e0e+ i+ 5ea"e! #ha amo & i /e+#me # &!a%e i %e0e+ ?e!!ill Ly ch 7o /e!#i*le Secu!i#ie+ I %e0e+

Klo*al Ko/e! me # Bo % ?a!"e# I %e0e+


Klo*al *o % ma!"e# %omi a#e% *y &o/e! me # i++ue+ Se/e!al i %e0e+ c!ea#e% *y ma$o! i /e+#me # fi!m+
( ( ( ( ?ea+u!e #o#al !a#e+ of !e#u! U+e ma!"e#1/alue 5ei&h#i & U+e #!a%e! '!ici & Bu# +am'le +i,e+ %iffe! a+ %o um*e!+ of cou #!ie+ i clu%e%

Klo*al Ko/e! me # Bo % ?a!"e# I %e0e+


.iffe!e ce+ affec# lo &1#e!m !i+"1!e#u! 'e!fo!ma ce Lo5 co!!ela#io amo & +e/e!al cou #!ie+ i+ +imila! #o +#oc"+ Si& ifica # e0cha &e !a#e effec# o /ola#ili#y a % co!!ela#io +

7om'o+i#e S#oc"1Bo % I %e0e+


Beyo % +e'a!a#e +#oc" i %e0e+ a % *o % i %e0e+ fo! i %i/i%ual cou #!ie+, a a#u!al +#e' i+ a com'o+i#e +e!ie+ #ha# mea+u!e+ #he 'e!fo!ma ce of all +ecu!i#ie+ i a &i/e cou #!y 3hi+ allo5+ e0ami a#io of *e efi#+ of %i/e!+ifica#io 5i#h a com*i a#io of a++e# cla++e+ +uch a+ +#oc"+ a % *o %+

?e!!ill Ly ch14il+hi!e U.S. 7a'i#al ?a!"e#+ I %e0 )?L147?I ?a!"e#1/alue 5ei&h#e% i %e0 mea+u!e+ #o#al !e#u! 'e!fo!ma ce of #he com*i e% U.S. #a0a*le fi0e% i come a % e6ui#y ma!"e#+ 7om*i a#io of ?e!!ill1Ly ch fi0e%1 i come i %e0e+ a % #he 4il+hi!e =>>> commo 1+#oc" i %e0 3!ac"+ o/e! 1>,>>> +#oc"+ a % *o %+

I clu%e+I
( ( ( (

B!i +o <a!# e!+ Klo*al Secu!i#y ?a!"e# I %e0 )KS?IU.S. +#oc"+ a % *o %+ 9o 1U.S. e6ui#ie+ 9o 1%olla! *o %+ Alloca#io #o ca+h

?a#che+ a #y'ical U.S. 'e +io fu % alloca#io 'olicy 7lo+e #o #he #heo!e#ical Oma!"e# 'o!#folio of !i+"y a++e#+P !efe!!e% #o i 7A<?

7om'a!i+o of I %e0e+ B/e! 3ime


7o!!ela#io + amo & mo #hly e6ui#y '!ice cha &e+
( ?o+# %iffe!e ce+ a!e a##!i*u#a*le #o +am'le %iffe!e ce+ ( .iffe!e # +e&me #+ of U.S. +#oc" ma!"e# o! f!om %iffe!e # cou #!ie+ ( Lo5e! co!!ela#io + *e#5ee 9:S2 +e!ie+ a % A?2@ +e!ie+ o! 9AS.AJ i %e0 #ha *e#5ee 9:S2 al#e! a#i/e +e!ie+ )S;< =>> a % 9:S2 com'o+i#e-

7o!!ela#io 7oefficie #+ Amo & ?o #hly <e!ce #a&e <!ice 7ha &e+ i Al#e! a#i/e 26ui#y ?a!"e# I %ica#o! Se!ie+I 8a ua!y 1972 )4he A/aila*le- #o .ecem*e! 1997
S ; < =>> S ; < =>> 9:S2 A?2@ 4il+hi!e =>>> Eu++ell 2>>> 3o!o #o 3>> 3o"yo S2 9i""ei FAQ F3 All1Sha!e ?1S 4o!l%
RRR

9:S2 RRR >.F>1 >.FF1 >.9F7 >.FDF >.761 >.299 >.3=> >.=3D >.712 >.F21 >.69=

9AS.AJ 4il+hi!e =>>> A?2@ I %.

Eu++ell 3o!o #o a 3>> 2>>>

3o"yo S2

9i""ei

FAQ

F3 ?1S * All1Sha!e 4o!l%

>.919 >.719 >.9>6 >.731 >.6F7 >.3>2 >.3=F >.=>1 >.61= >.763

RRR

9AS.AJ I %. >.7F3

>.F2D >.F17 >.76D >.76F >.2D= >.2F> >.3F1 >.=91 >.6=F >.=>F

RRR

>.9>6 >.913 >.7D> >.2=1 >.3>F >.D>D >.62> >.7>D >.=F9


$

RRR

>.F7> >.76F >.2FD >.33= >.=1= >.693 >.F>F >.666

RRR

-a$l( ..11 pag( 172


RRR

>.723 >.2D9 >.32= >.DD> >.61F >.669 >.=72

>.269 >.293 >.D=2 >.627 >.71D >.616

RRR

>.F72 >.279 >.266 >.==F >.66D

RRR

>.33> >.379 >.631 >.731

RRR

>.=1D >.=2= >.=>=

RRR

>.6=1 >.617

RRR

F3LS;< 4o!l% >.=9>


$

>.96>

a a 'uss(ll 2/// s(ri(s starts in 1979

'uss(ll 2/// S(ri(s starts in 1979.

%01 an# %- 0ll2Shar( s(ri(s starts in 193 .

%01 an# %- 0ll2Shar( s(ri(s start in 193 c c %-4S)P 5orl# 6n#(" s(ri(s starts in 193!

%-4S)P 5orl# 6n#(" s(ri(s starts in 193!

7om'a!i+o of I %e0e+ B/e! 3ime


7o!!ela#io + amo & mo #hly *o % i %e0e+
( Amo & i /e+#me #1&!a%e *o %+ co!!ela#io + !a &e f!om >.9> #o >.99 ( I #e!e+# !a#e+ %iffe! *y !i+" '!emium+ ( Ea#e+ of !e#u! a!e %e#e!mi e% *y +y+#ema#ic i #e!e+# !a#e /a!ia*le+ ( Lo5 co!!ela#io i &lo*al !e#u! + #o U.S. !e#u! + +u''o!# &lo*al %i/e!+ifica#io

7om'a!i+o of I %e0e+ B/e! 3ime


?ea a ual +#oc" '!ice cha &e+
( .x"ect differences amon! "rice chan!es and measures of risk for various series due to the different sam"les ( */ . series should have lower rates of return and risk measure than 0#., and +1' series ( 2esults !enerally confirm these ex"ectations ( 'anadian results had hi!her avera!e returns than */ . and lower risk than *0 %0Q

7om'a!i+o of I %e0e+ B/e! 3ime


?ea a ual +#oc" '!ice cha &e+
( United 3in!dom (&1 0ll- hare) had hi!her returns than */ . indexes4 but much lar!er variability ( 5a"anese markets ex"erienced lower returns and sli!htly lower volatility than the U6 6 markets ( 5a"anese market shows low correlation with alternative U6 6 stock-market indexes and could be a "rime source of diversification

7om'a!i+o of I %e0e+ B/e! 3ime


A ual Bo % Ea#e+ of Ee#u!
( 3o#al !a#e+ of !e#u! fo! *o %1ma!"e# i %e0e+ ca o# *e %i!ec#ly com'a!e% #o +#oc" 'e!ce #a&e '!ice cha &e !e+ul#+ ( 20'ec# %iffe!e ce i le/el of !e#u! %ue #o %iffe!e #ial !i+" '!emium+ ( Ee+ul#+ co fi!m e0'ec#a#io +

3he I #e! e# Investments Online


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Sou!ce+ of I fo!ma#io o Klo*al I /e+#me #+
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