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 exchange-traded funds.

  1. Gauges of Market Sentiment: the original purpose of indices was to get a sense of investor confidence and market sentiment.
  2. Return/Risk Proxies: indices play a useful role in the capital asset pricing model as a certain index (like the S&P 500) sets the expected return and risk for the overall market. Beta (systematic risk) can then be calculated for individual securities based on their covariance with the index and alpha (risk-adjusted excess returns) can be calculated for active managers.
  3. Asset Class Proxies: Future assumptions regarding the return and risk profiles of certain asset classes are largely centered on how various broad indices have performed in the past.
  4. Active Management Benchmarks: indices can also be useful in judging the relative performance of active managers as long as the selected benchmark targets the same markets as the active manager.
  5. Model Portfolios: indices dictate the investments and weightings of index funds and exchange-traded funds, which help investors gain passive broad exposure to certain markets – usually at a lower cost than active management.

Question

What type of actively-managed fund might use the S&P 500 as a performance benchmark?

A. US small-cap equity fund

B. US large-cap equity fund

C. Global large-cap equity fund

Solution

The correct answer is B.

Since the S&P 500 is based on the largest 500 liquid and publicly-listed stocks in the United States, it would not serve as an appropriate benchmark for a US small cap equity fund or for a global large cap fund.

Reading 37 LOS 37g:

Describe uses of security market indices



Isha Shahid
Isha Shahid
2020-11-21
Literally the best youtube teacher out there. I prefer taking his lectures than my own course lecturer cause he explains with such clarity and simplicity.
Artur Stypułkowski
Artur Stypułkowski
2020-11-06
Excellent quality, free materials. Great work!
Ahmad S. Hilal
Ahmad S. Hilal
2020-11-03
One of the best FRM material provider. Very helpful chapters explanations on youtube by professor James Forjan.
Rodolfo Blasser
Rodolfo Blasser
2020-10-15
The content is masters degree-level, very well explained and for sure a valuable resource for every finance professional that aims to have a deep understanding of quantitative methods.
Mirah R
Mirah R
2020-10-15
Great course! Very helpful
Priyanka
Priyanka
2020-09-29
Analyst Prep has actually been my soul guide towards this journey of FRM.I really appreciate the videos ad they are ALIGNED , good speed, and the Professor just keeps everything Super CASUAL. If I Clear my exams Ultimately credit goes to you guys. Keep sharing. God bless.
Sar Dino
Sar Dino
2020-09-29
Had a test on actuarial science coming up and was dead on all the concepts (had to start from ground zero). came across the channel as it had small bits of FM chapters consolidated by the professor Stephen paris. this made it easy for me to look at the chapters i was having trouble with (basically everything lol). I love the way he explains the questions, and the visualization! its so helpful for me to see the diagrams and how the formulas move around. he really did a great job explaining, and i understand so much better. 7 weeks worth of lessons condensed into 3 days of binge watching their videos.... Amazing and i am truly baffled as to why the videos have not gained traction as they should have!

Share:


Related Posts

Using Price Multiples to Value Equity

The use of price multipliers to earnings, book value, and sales have all...

Market Efficiency for Fundamental Analysis

The table below shows if abnormal returns can be earned through various strategies...