Definition of Index

Index

A series of numbers measuring percentage changes over time from a base period. The index number for the base period is by convention set equal to 100.
indexing
Linking money payments to a price index to hold the real value of those money payments constant.

index

An index is a statistical measure of a market based on the performance of a sample of securities in that market. For example, the S&P/TSX Composite index reflects the performance of the most actively traded stocks on The Toronto Stock Exchange.

Arms index

Also known as a trading index (TRIN)= (number of advancing issues)/ (number of declining
issues) (Total up volume )/ (total down volume). An advance/decline market indicator. Less than 1.0 indicates
bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average.

Bond indexing

Designing a portfolio so that its performance will match the performance of some bond index.

Buying the index

Purchasing the stocks in the S&P 500 in the same proportion as the index to achieve the
same return.

Consumer Price Index (CPI)

The CPI, as it is called, measures the prices of consumer goods and services and is a
measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.

EAFE index

The European, Australian, and Far East stock index, computed by Morgan Stanley.

Enhanced indexing

Also called indexing plus, an indexing strategy whose objective is to exceed or replicate
the total return performance of some predetermined index.

Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).

Index arbitrage

An investment/trading strategy that exploits divergences between actual and theoretical
futures prices.

Index fund

Investment fund designed to match the returns on a stockmarket index.

Index model

A model of stock returns using a market index such as the S&P 500 to represent common or
systematic risk factors.

Index option

A call or put option based on a stock market index.

Index warrant

A stock index option issued by either a corporate or sovereign entity as part of a security
offering, and guaranteed by an option clearing corporation.

Indexed bond

Bond whose payments are linked to an index, e.g. the consumer price index.

Indexing

A passive instrument strategy consisting of the construction of a portfolio of stocks designed to
track the total return performance of an index of stocks.

Jensen index

An index that uses the capital asset pricing model to determine whether a money manager
outperformed a market index. The "alpha" of an investment or investment manager.

Market value-weighted index

An index of a group of securities computed by calculating a weighted average
of the returns on each security in the index, with the weights proportional to outstanding market value.

Optimization approach to indexing

An approach to indexing which seeks to Optimize some objective, such
as to maximize the portfolio yield, to maximize convexity, or to maximize expected total returns.

Profitability index

The present value of the future cash flows divided by the initial investment. Also called
the benefit-cost ratio.

Pure index fund

A portfolio that is managed so as to perfectly replicate the performance of the market portfolio.

Risk indexes

Categories of risk used to calculate fundamental beta, including (1) market variability, (2)
earnings variability, (3) low valuation, (4) immaturity and smallness, (5) growth orientation, and (6) financial risk.

Single index model

A model of stock returns that decomposes influences on returns into a systematic factor,
as measured by the return on the broad market index, and firm specific factors.

Single-index model

Related: market model

Stock index option

An option in which the underlying is a common stock index.

Stratified equity indexing

A method of constructing a replicating portfolio in which the stocks in the index
are classified into stratum, and each stratum is represented in the portfolio.

Stratified sampling approach to indexing

An approach in which the index is divided into cells, each
representing a different characteristic of the index, such as duration or maturity.

Stratified sampling bond indexing

A method of bond indexing that divides the index into cells, each cell
representing a different characteristic, and that buys bonds to match those characteristics.

Strike index

For a stock index option, the index value at which the buyer of the option can buy or sell the
underlying stock index. The strike index is converted to a dollar value by multiplying by the option's contract multiple.
Related: strike price

Treynor Index

A measure of the excess return per unit of risk, where excess return is defined as the
difference between the portfolio's return and the risk-free rate of return over the same evaluation period and
where the unit of risk is the portfolio's beta.

Profitability index

See cash value added.

Profitability Index

A method for determining the profitability of an investment. It is
calculated by dividing the present value of the future net cash flows
by the initial cash investment.

present value index

see profitability index

profitability index (Pl)

a ratio that compares the present value of net cash flows to the present value of the net investment

market index

Measure of the investment performance of the overall market.

profitability index

Ratio of net present value to initial investment.

Standard & Poor’s Composite Index

index of the investment performance of a portfolio of 500 large stocks. Also called the
S&P 500.

Consumer Price Index (CPI)

An index calculated by tracking the cost of a typical bundle of consumer goods and services over time. It is commonly used to measure inflation.

Price Index

A measure of the price level calculated by comparing the cost of a bundle of goods and services in a given year with its cost in a base year. See also index.

index funds

Mutual funds that aim to track the performance of a specific stock or bond index. This process is also referred to as indexing and passive management.

Index Portfolio Rebalancing Service (IPRS)

index Portfolio Rebalancing Service (IPRS) is a comprehensive investment service that can help increase potential returns while reducing volatility. Several portfolios are available, each with its own strategic balance of index Funds. IPRS maintains your personal asset allocation by monitoring and rebalancing your portfolio semi-annually.

Indexation

The adjustment of benefits to compensate for the effects of inflation.

Alpha

A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A
positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market
return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%.
An alpha of -0.6 means a fund's monthly return was 0.6% less than would have been predicted from the
change in the market alone. In a Jensen index, it is factor to represent the portfolio's performance that
diverges from its beta, representing a measure of the manager's performance.

ARM

Adjustable rate mortgage. A mortgage that features predetermined adjustments of the loan interest rate
at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate
equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to perinterval
and to life-of-loan interest rate and/or payment rate caps.

Benchmark

The performance of a predetermined set of securities, for comparison purposes. Such sets may be
based on published indexes or may be customized to suit an investment strategy.

Beta (Mutual Funds)

The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means
the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely
to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to
general market conditions that cannot be diversified away.

Beta equation (Mutual Funds)

The beta of a fund is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 index
y = rate of return for the fund

Beta equation (Stocks)

The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 index
y = rate of return for the stock

Bull CD, Bear CD

A bull CD pays its holder a specified percentage of the increase in return on a specified
market index while guaranteeing a minimum rate of return. A bear CD pays the holder a fraction of any fall in
a given market index.

Capitalization method

A method of constructing a replicating portfolio in which the manager purchases a
number of the largest-capitalized names in the index stock in proportion to their capitalization.

Cash settlement contracts

Futures contracts, such as stock index futures, that settle for cash, not involving
the delivery of the underlying.

Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.

Difference from S&P

A mutual fund's return minus the change in the Standard & Poors 500 index for the
same time period. A notation of -5.00 means the fund return was 5 percentage points less than the gain in the
S&P, while 0.00 means that the fund and the S&P had the same return.

Dow Jones industrial average

This is the best known U.S.index of stocks. It contains 30 stocks that trade on
the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest
U.S.companies are performing. There are thousands of investment indexes around the world for stocks,
bonds, currencies and commodities.

Equity swap

A swap in which the cash flows that are exchanged are based on the total return on some stock
market index and an interest rate (either a fixed rate or a floating rate). Related: interest rate swap.

European Currency Unit (ECU)

An index of foreign exchange consisting of about 10 European currencies,
originally devised in 1979.

Expected return

The return expected on a risky asset based on a probability distribution for the possible rates
of return. Expected return equals some risk free rate (generally the prevailing U.S. Treasury note or bond rate)
plus a risk premium (the difference between the historic market return, based upon a well diversified index
such as the S&P500 and historic U.S. Treasury bond) multiplied by the assets beta.

Fundamental descriptors

In the model for calculating fundamental beta, ratios in risk indexes other than
market variability, which rely on financial data other than price data.

Futures contract multiple

A constant, set by an exchange, which when multiplied by the futures price gives
the dollar value of a stock index futures contract.

Market model

This relationship is sometimes called the single-index model. The market model says that the
return on a security depends on the return on the market portfolio and the extent of the security's
responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to
the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against
returns on the market portfolio.

Mutual fund theorem

A result associated with the CAPM, asserting that investors will choose to invest their
entire risky portfolio in a market-index or mutual fund.

Options contract multiple

A constant, set at $100, which when multiplied by the cash index value gives the
dollar value of the stock index underlying an option. That is, dollar value of the underlying stock index = cash
index value x $100 (the options contract multiple).

Passive portfolio strategy

A strategy that involves minimal expectational input, and instead relies on
diversification to match the performance of some market index. A passive strategy assumes that the
marketplace will reflect all available information in the price paid for securities, and therefore, does not
attempt to find mispriced securities. Related: active portfolio strategy

Passive investment management

Buying a well-diversified portfolio to represent a broad-based market
index without attempting to search out mispriced securities.

Passive portfolio

A market index portfolio.

Relative strength

A stock's price movement over the past year as compared to a market index (the S&P 500).
Value below 1.0 means the stock shows relative weakness in price movement (underperformed the market); a
value above 1.0 means the stock shows relative strength over the 1-year period. Equation for Relative
Strength: [current stock price/year-ago stock price] [current S&P 500/year-ago S&P 500]

Replicating portfolio

A portfolio constructed to match an index or benchmark.

Residuals

1) Parts of stock returns not explained by the explanatory variable (the market-index return). They
measure the impact of firm-specific events during a particular period.
2) Remainder cash flows generated by pool collateral and those needed to fund bonds supported by the collateral.

Sharpe benchmark

A statistically created benchmark that adjusts for a managers' index-like tendencies.

Sharpe ratio

A measure of a portfolio's excess return relative to the total variability of the portfolio. Related:
treynor index

Tilted portfolio

An indexing strategy that is linked to active management through the emphasis of a
particular industry sector, selected performance factors such as earnings momentum, dividend yield, priceearnings
ratio, or selected economic factors such as interest rates and inflation.

Tracking error

In an indexing strategy, the difference between the performance of the benchmark and the
replicating portfolio.

Triple witching hour

The four times a year that the S&P futures contract expires at the same time as the S&P
100 index option contract and option contracts on individual stocks.

Variance minimization approach to tracking

An approach to bond indexing that uses historical data to
estimate the variance of the tracking error.

Beta

The price volatility of a financial instrument relative to the price
volatility of a market or index as a whole. Beta is most commonly used with
respect to equities. A high-beta instrument is riskier than a low-beta
instrument.

Constant dollar accounting

A method for restating financial statements by reducing or
increasing reported revenues and expenses by changes in the consumer price index,
thereby achieving greater comparability between accounting periods.

Dow Jones Industrial Average

index of the investment performance of a portfolio of 30 “blue-chip” stocks.

market portfolio

Portfolio of all assets in the economy. In practice a broad stock market index, such as the Standard & Poor's Composite, is used to represent the market.

S&P

Abbreviation for Standard & Poor’s stockmarket index.

Base Year

The reference year when constructing a price index. By tradition it is given the value 100.

Deflator

A price index used to deflate a nominal value to a real value by dividing the nominal value by the price deflator.

GDP Deflator

Price index used to deflate nominal GDP to real GDP by dividing nominal GDP by the GDP deflator.

Price Level

A weighted average of prices of all goods and services where the weights are given by total spending on each good or service. Measured by a price index.

Real GDP

GDP expressed in base-year dollars, calculated by dividing nominal GDP by a price index.

Real Income

Income expressed in base-year dollars, calculated by dividing nominal income by a price index.

Real Money Supply

Money supply expressed in base-year dollars, calculated by dividing the money supply by a price index.

Real Wage

Wage expressed in base-year dollars, calculated by dividing the money wage by a price index.

Terms of Trade

The quantity of imports that can be obtained for a unit of exports, measured by the ratio of an export price index to an import price index.

Escalating Price Option

A nonqualified stock option that uses a sliding scale for
the option price that changes in concert with a peer group index.

Related to : financial, finance, business, accounting, payroll, inventory, investment, money, inventory control, stock trading, financial advisor, tax advisor, credit.