CHAPTER 2

SECURITY MARKET INDICES

Paul D. Kaplan, CFA

London, U.K.

Dorothy C. Kelly, CFA

Charlottesville, VA, U.S.A.

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

  • Describe a security market index.
  • Calculate and interpret the value, price return, and total return of an index.
  • Discuss the choices and issues in index construction and management.
  • Compare and contrast the different weighting methods used in index construction.
  • Calculate and interpret the value and return of an index on the basis of its weighting method.
  • Discuss rebalancing and reconstitution.
  • Discuss uses of security market indices.
  • Discuss types of equity indices.
  • Discuss types of fixed-income indices.
  • Discuss indices representing alternative investments.
  • Compare and contrast the types of security market indices.

1. INTRODUCTION

Investors gather and analyze vast amounts of information about security markets on a continual basis. Because this work can be both time consuming and data intensive, investors often use a single measure that consolidates this information and reflects the performance of an entire security market.

in dex, noun (pl. in dex es or in di ces)

Latin indic-, index, from indicare to indicate: an indicator, sign, or measure of something.

Security market indices were first introduced as a simple measure to reflect the performance of the U.S. stock market. Since then, security market indices have evolved into important multipurpose tools that help investors ...

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