Index Calculation Primer

Index Calculation Primer
Roger J. Bos, CFA
Senior Index Analyst
Standard & Poor's
[email protected]
July 17, 2000
Roger J. Bos, CFA - Standard & Poor's Quantitative Services 2
What is an index?
? An index is a single descriptive statistic that
summarizes the relative change in an
underlying group of variables.
? In an equity index, such as the S&P 500, the
underlying variables are stocks.
? The main differences among indexes is the
types of securities held and the weighting
scheme.
Roger J. Bos, CFA - Standard & Poor's Quantitative Services 3
Index Groupings
? There are many types of indexes, each
trying to measure different groups of stocks:
Broad based Narrow
Small Cap Economic Sector
Mid Cap Industry
Large Cap
Value
Growth
Geographic region
? Or any combination of the above.
Roger J. Bos, CFA - Standard & Poor's Quantitative Services 4
Index Groupings
? These groupings are usually based on
simple financial ratios.
? Size (small, mid, or large) is based on
market cap, which is price times shares
outstanding.
? Style (value or growth) is often based on
book to price ratio, which is the company's
common equity divided by its share price.
Roger J. Bos, CFA - Standard & Poor's Quantitative Services 5
Index Weightings
? Index constituents can be either equal weighted, price
weighted, or cap weighted.
? Lets say we wanted to form a new index comprised of the
five largest cap stocks in the S&P 500 as of May 31, 2000.
Sales Shares Price
? CISCO SYSTEMS INC 12,154.00 7000.939 56.938
? EXXON MOBIL CORP 160,883.00 3481.021 83.312
? GENERAL ELECTRIC CO 110,832.00 9882.338 52.688
? INTEL CORP 29,389 ...
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