Positions an Investor Can Take in an Asset
A position in an asset describes how much of the asset an investor owns. The investor can either have a long position, meaning the investor owns the asset or has borrowed money to purchase the asset, or the investor can…
Margin Transactions
Leveraged Positions In many markets, traders can borrow securities through margin loans at the cost of paying the call money rate on the loan. Similar to a down payment on a house, the borrower must put up a minimum of…
Execution, Validity, and Clearing Instructions
The bid prices represent the price at which dealers are prepared to buy, while the ask prices, or offer prices, indicate the prices at which they are willing to sell. Ask prices consistently exceed bid prices. Dealers also specify the…
Methods for Investing in Non-domestic Equity Securities
Along with the technological advancements in recent decades, it has become significantly easier for investors to make international investments at low costs. Similarly, international issuers are now more capable of raising money from foreign investors. This increase in global investment…
Rebalancing and Reconstitution of an Index
Index managers must consider when the index should be rebalanced and when the security selection and weighting decisions should be re-examined. Rebalancing Rebalancing refers to adjusting the weights of the constituent securities in the index on a regularly scheduled basis…
Security Market Indices
The primary uses of market indices are to (1) gauge market sentiments, (2) serve as proxies for measuring returns and risk, (3) serve as proxies for asset classes, (4) benchmark active managers, and (5) model portfolios for index funds and…
The Value and Return of an Index
Every index weighting method has a formula that calculates the weighting of a given constituent security within an index. For the following examples, the same portfolio of three securities will be used to help illustrate the weighting methods. Note that…
Weighting Methods Used in Index Construction
There is no perfect index weighting method as each one has its own strengths and weaknesses. Price Weighting In price-weighted indices, an equal number of shares of each security is purchased, and the beginning divisor is usually set to the…
Issues in Index Construction
Index providers generally take a top-down approach to constructing a portfolio by defining: the target market; the portfolio constituents within that market; the weights of individual securities; the rebalancing frequency; and when to re-examine the portfolio construction methods. Target Market…
Price Return and Total Return of an Index
Index Value The formula for calculating the value of a price return index is as follow: $$ V_{PRI} = \frac{ \sum_{i=1}^{N}{n_iP_i} } { D } $$ Where: VPRI = the value of the price return index ni = the number…
