# CHAPTER 3: IMC

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What makes a benchmark appropriate?
Consistent with approach and style, measurable, unambiguous, clearly defined, reflective of managers current investment options, manager should know about the securities of the benchmark, benchmark should be investable.
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When does an index become a benchmark
1) When it is used to determine the amount payable under a financial instrument or financial contract
2) When it is used to measure the performance of a fund
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What do stock or share indices measure
The increase in share prices in certain markets
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How are bond indices calculated
Calculated as total return indices including both movement in bond prices and the coupon income recieved
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Index value rebase
If the base is now 58. Then this will be
58 x 100/58 = 100 (base value)
If the following year the price is 55, this will be 55 x 100/58 = 94.8
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Simple arithmetic index formula
B x ( Sum of the new prices / sum of prices in base year)

B = base value
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Geometric index of stocks
Measures the rate of change in the prices making up the index.
Same as geometric mean use square root and nth amount of stocks.
Might need to work out differences first i.e. new price / base.
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Features of geometric indices
1) When there is a change of capital, the base price is changed.
2) Less sensitive to large changes in the price
3) If the price of any 1 constituent goes to 0, the whole index falls to 0.
4)Will always be less than or equal to the simple arithmetic i
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Market Value weighted indices
Give more influence to the shares of larger companies.

B x (new share x new price) / (base share x base price)

B= base value i.e. 100
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FT 30
Nikkei
FT30: Equally weighted geometric
Nikkei: Unweighted arithmetic

The rest are weighted arithmetic
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## Other cards in this set

### Card 2

#### Front

1) When it is used to determine the amount payable under a financial instrument or financial contract
2) When it is used to measure the performance of a fund

#### Back

When does an index become a benchmark

### Card 3

#### Front

The increase in share prices in certain markets

### Card 4

#### Front

Calculated as total return indices including both movement in bond prices and the coupon income recieved

### Card 5

#### Front

If the base is now 58. Then this will be
58 x 100/58 = 100 (base value)
If the following year the price is 55, this will be 55 x 100/58 = 94.8