Fin 423 notes.docx - Fin 423 Stock market Indices o Price-weighted index Advantages cheap easy to track the indices Disadvantages only 30 companies(DJIA

Fin 423 notes.docx - Fin 423 Stock market Indices o...

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Fin 423 Stock market Indices o Price-weighted index Advantages: cheap, easy to track the indices Disadvantages: only 30 companies (DJIA) and price- weighted Stock Split Adjustment – Change the divisor o Value-weighted index: follow a passive strategy and better than Price-weighted Only reflect capital gains not cash payments (but u can calculate on your own) Advantages: company value drives the index, cheap easy and efficient Disadvantages: the index is top-heavy not super diversified if the market is not completely efficient, some stock price is misplaced, then the index will underperform because the manager will hold too much of overpriced stocks and too little of underpriced stocks. o Equal-weighted Index: selling winner and buying losers (long term horizon) Advantages: overcome market inefficiency by buying more underpriced and buying less overpriced. Find the true price Disadvantage: trade a lot/ less tax efficient, really hard to do equal weight with small companies Equal weighted: risker and more returns cuz investment in small firms
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Risk and Returns (09/16) o Net Return or Holding Period Return o Gross Return (Net return +1) o Income Yield = div/P o Capital Gain o Real Returns: adjusted due to inflation Germany VS Brazil: Germany has the higher real rate of return, cuz lower inflation rate o After tax return: marginal tax rate o Compounding Returns Arithmetic average returns (15%) Geometric average returns (CAGR) always lower than the mean due to compounding The longer the horizon the bigger the variance the
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