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Index Calculation Primer

Index Calculation Primer
Roger J. Bos, CFA
Senior Index Analyst
Standard & Poor's
roger_bos@standardandpoors.com
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 29,389.00 3348.987 124.688
• MICROSOFT CORP 19,747.00 5242.042 62.562
Roger J. Bos, CFA - Standard & Poor's Quantitative Services 6
Equal Weighted
• Equal weighting would consist of giving each stock equal
representation in the index. In this example that's a weight of 20%.
• To design such an index, we would designate...