Finance: Capital Markets, Financial Management, and Investment Management

CHAPTER 18

Equity Portfolio Management

In this chapter, we provide an overview of equity portfolio management and describe the various strategies pursued by asset managers and the evidence on the performance of such strategies.

STOCK MARKET INDICATORS

Stock market indicators perform a variety of functions, from serving as benchmarks for evaluating the performance of professional money managers to answering the question “How did the market do today?” Thus stock market indicators (indexes or averages) are a part of everyday life. Even though many of the stock market indicators are used interchangeably, it is important to realize that each indicator applies to, and measures, a different facet of the stock market.

Tables 18.1 and 18.2 provide a list of the various stock indexes in the United States. In general, stock market indexes rise and fall in fairly similar patterns. The indexes do not move in exactly the same ways at all times. The differences in movement reflect the different ways in which the indexes are constructed. Three factors enter into that construction:

• The universe of stocks represented by the sample underlying the index.

• The relative weights assigned to the stocks included in the index.

• The method of averaging across all the stocks in the index.

The stocks included in a stock market index must be combined in certain proportions, and each stock must be given a weight. The three main approaches to weighting are (1) weighting by the market capitalization of the ...