For markets to be efficient, prices should adjust quickly and rationally to the release of new information. In other words, prices of assets in an efficient market should “fully reflect” all information. Market Participants One of the most critical factors contributing to the degree of efficiency in a market is the number of market participants. …
An informationally efficient market (an efficient market) is a market in which asset prices reflect new information quickly and rationally. An efficient market is thus a market in which asset prices reflect all past and present information. Investment managers and analysts, as noted, are interested in market efficiency because the extent to which a market…
Three of the most widely followed alternative investment classes are commodities, real estate, and hedge funds. Commodity Indexes Commodity indexes consist of futures contracts on one or more commodities, such as agricultural products (rice, wheat, sugar), livestock (cattle, hogs), precious and common metals (gold, silver, copper), and energy commodities (crude oil, natural gas). Real Estate…
Construction The fixed-income universe includes securities issued by governments, government agencies, and corporations. Each of these entities may issue a variety of fixed-income securities with different characteristics. As a result, the number of fixed-income securities is many times larger than the number of equity securities. To represent a specific fixed-income market or segment, indexes may…
Broad Market Indexes A broad equity market index, as its name suggests, represents an entire given equity market and typically includes securities representing more than 90 percent of the selected market. Multi-Market Indexes Multi-market indexes usually comprise indexes from different countries and regions and are designed to represent multiple security markets. Multi-market indexes may represent…
Some of the major uses of indexes include: Gauges of Market Sentiment The original purpose of stock market indexes was to provide a gauge of investor confidence or market sentiment. As indicators of the collective opinion of market participants, indexes reflect investor attitudes and behaviour. Proxies for Measuring and Modelling Returns, Systematic Risk, and Risk-Adjusted…
Rebalancing Rebalancing refers to adjusting the weights of the constituent securities in the index. To maintain the weight of each security consistent with the index’s weighting method, the index provider rebalances the index by adjusting the weights of the constituent securities on a regularly scheduled basis (rebalancing dates)—usually quarterly. Rebalancing is necessary because the weights…
Constructing and managing a security market index is similar to constructing and managing a portfolio of securities. Index providers must decide the following: Target Market and Security Selection The first decision in index construction is identifying the target market, market segment, or asset class that the index is intended to represent. The target market may…
A security market index represents a given security market, market segment, or asset class. Most indexes are constructed as portfolios of marketable securities. The value of an index is calculated on a regular basis using either the actual or estimated market prices of the individual securities, known as constituent securities, with the index. For each…
The objectives of market regulation are to: