Index Fever

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Index Fever

• Taxonomy of Indices
• Relationship Between Broad Market Indices

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Taxonomy of Equity Indices

• Broad (US) Equity Indices
• DJIA, SP500,Value Line 1700, Russell 3000,
  Wilshire 5000
• Market Indices
• NYSE Composite, NASDAQ Comp., FT100, Nikkei 225
• Technical Indicators
• PREM, TICK, ARMS,
• Industry Indices
• SOX, MSH, BKX, DJTRAN, DJUTIL, XOI

• Equity Market Sectors
• size small, mid-cap, large
• value growth, value
• International (from US view)
• developed markets e.g. MSCIs EAFE for Europe,
  Australia, Far East
• Emerging Markets less developed markets
• ex Barings Emerging Markets Index includes
  Korea and Taiwan
• Equity Futures and Options Indices
• MMI (XMI) SP100 (OEX)

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Broad Equity Market Returns
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Some Details about the Russells

• Weights are capitalization weights
  capitalization price X number of shares
• The Frank Russell Company takes all 6,000 traded
  stocks and ranks them by market cap.
• Russell excludes cross-ownership in the
  evaluation of market cap. (In US about 5 of
  equity is double counted. One firm owning shares
  of another.)
• Russell excludes ADRs (these are not US equity)
• The Russell 3000 is the top 3,000 stocks by
  market capitalization. Russell claims it
  represents 98 of investible US Equity market, or
  13.2 trillion as of 6/99
• The top 1,000 stocks in the Russell 3,000 are
  used for the Russell 1000
• The next 2,000 stocks are used for the Russell
  2,000

• Russell 3000 (Total Cap 13.2 Trillion)
• avg. mkt cap 4.4 billion
• median mkt cap 701.7 million
• largest weight 407.1bill/13.2 Trillion .031
• smallest weight 178.2million/13.2Trill .00001
• Russell 1000 (Total Cap 12.1 Trillion)
• avg. mkt cap 12.1 billion
• median mkt cap 3.8 billion
• largest weight 407.1bill/12.1 Trillion .034
• smallest weight 1.4 billion/12.1Trillion
  .00011
• Russell 2000 (Total Cap 1.05Trillion)
• avg. mkt cap 526.4 million
• median mkt cap 178 million
• largest weight 1.4billion/1.05Trillion
  .00129
• smallest weight 178million/1.05Trillion.00017

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Comparison of Market Values from June 1997 to
June 1999
June 1998 11.1 trillion 3.7 billion
793.3 million 271.6bill/11.1 Trillion .024
221.9million/11.1Trill .00002 9.9
trillion 9.9 billion 3.7 billion
271.6bill/9.9 Trillion .027 1.4
billion/9.9Trillion .00014
1.2Trillion 592 million 395 million
1.4billion/1.2Trillion .00116
221.9million/1.2Trillion.00018

• June 1997
• Russell 3000 Total Cap 8.4 trillion
• avg. mkt cap 2.8 billion
• median mkt cap 639 million
• largest weight 198bill/8.4 Trillion .024
• smallest weight 172 million/8.4Trill .00002
• Russell 1000 Total Cap 7.6 trillion
• avg. mkt cap 7.6 billion
• median mkt cap 3.0 billion
• largest weight 198bill/7.6 Trillion .026
• smallest weight 1.1 billion/7.6Trillion .00015
• Russell 2000 Total Cap 934 billion
• avg. mkt cap 467 million
• median mkt cap 395 million
• largest weight 1.1billion/934billion .00118
• smallest weight 172 million/934billion .00018

June 1999 13.2 Trillion 4.4 billion 701.7
million 407.1bill/13.2 Trillion .031
178.2million/13.2Trill .00001 12.1 Trillion
12.1 billion 3.8 billion 407.1bill/12.1
Trillion .034 1.4 billion/12.1Trillion
.00011 1.05Trillion avg. mkt cap 526.4
million median mkt cap 178 million largest
weight 1.4billion/1.05Trillion
.00129 smallest weight 178million/1.05Trillion.
00017
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TOTAL RETURNS ON BROAD MARKET INDICES

• Data
• SP500 296 months January 1975 to August
  1999
• SP1500 105 months December 1990 to August
  1999
• Wishire5000 296 months January 1975 to
  August 1999
• R1000 248 months January 1979 to August 1999
  R3000 248 months January 1979 to August
  1999
• Correlation
• SP500 SP1500 W5000 R1000 R3000
• SP500 1
• SP1500 .996 1
• W5000 .986 .995 1
• R1000 .996 .998 .998 1
• R3000 .992 .995 .995 .998 1

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Regression Results

• Using the data ending in August 1999
• W5000 -.00014 1.015 SP500 R2
  .976 n 296
• (t -.34) (t 110.1)
• R1000 -0.000279 1.007 SP500 R2
  .991 n 248
• (t -1.025) (t 167.6)
• R3000 -0.000518 1.013 SP500 R2
  .983 n 248
• (t --1.35) (t 111.6)
• SP1500 -.00010 1.0022 SP500 R2
  0.992 n 105
• (t -.28) (t 111.8)

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Our Claim There is no difference in these
indices.

• Prove us wrong! Suppose you are working for a
  money management firm that is not sure whether we
  are right. Your assignment is to investigate our
  claim and specifically answer the question Can
  you use statistics to show that the indices are
  different?
• Steps in the assignment
• Step1Download the spreadsheet MarketIndices.xls
  from the course website.
• Step 2 There are monthly returns on the SP500,
  the Russell 1000 and the Russell 3000 from
  January 1979 to November 2000.
• Step 3 Use alt-tools-data analysis- regression
  to run the regression of the broad market indices
  on each other. (If data analysis is not
  available, use alt-tools-add ins to add analysis
  tool pack and analysis tool pack VBA, to get the
  data analysis menu item on alt-tools)
• Hint The standard evaluation period in the money
  management business is 36 months ending on a
  quarter (March, June, Sept, Dec.). Examine
  sub-periods to determine if there is a
  difference.
• Step 4 Email your spreadsheet to
  charles_at_trzcinka.com . If your spreadsheet is too
  disorganized to read we will give it a low grade.
  If it has a virus attached, well give it an F
  grade.