Index Calculation Primer

Index Calculation Primer

Roger J. Bos, CFA

Senior Index Analyst

Standard & Poor’s

roger_bos@standardandpoors.com

July 17, 2000

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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.

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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.

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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.

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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

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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 some amount of fictional

money (say $10,000) to be invested in each stock. Then divide that

amount by the stock price to get how many shares to buy. Lets call

this number Index Shares.

Price Index Shares Dollar Holdings

• CISCO SYSTEMS INC 56.938 175.629 10,000

• EXXON MOBIL CORP 83.312 120.031 10,000

• GENERAL ELECTRIC CO 52.688 189.797 10,000

• INTEL CORP 124.688 80.200 10,000

• MICROSOFT CORP 62.562 159.841 10,000

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Price Weighted