StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

The Rationale of Equity Indexation - Essay Example

Cite this document
Summary
This paper explains the rationale behind equity indexation as used in investment management and begins with an explanation of the capital market for equities and how it behaves. Next, equity index and how it is formulated is discussed, before looking at basic forms of investment strategies, how an equity index can be used to form the basis of an investment strategy, and how such a strategy compares with other investment strategies.
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER92.9% of users find it useful
The Rationale of Equity Indexation
Read Text Preview

Extract of sample "The Rationale of Equity Indexation"

Download file to see previous pages

Capital market transactions are deemed efficient in the absence of intermediaries except for brokers who put buyers and sellers together and get a small commission, making the deal almost frictionless. With transaction costs negligible, the only real factor that determines the current price of a stock should be the net present value of its future cash flows in the form of dividends and, assuming the company lasts long enough, capital gains when the stock is sold at a future date. After all, a stock is nothing else but a claim to a company's future cash flows, and that its price indicates its net present value given the amount of cash it would generate over a future period of time (Graham, 1984).

A company's cash flow is affected by several factors, such as business prospects, management quality, the economy's over-all performance, and the company's past performance. If these sets of information are known, computing for free cash flow looks relatively straightforward, and using a discount rate, the stock's present value can be easily calculated. If the market price is lower than the present value, the stock is bought. Otherwise, if one is holding the stock, it is sold. The low transaction costs of capital markets.

"Beating the market" means that an investor cannot generate a rate of return from investing in the equities market that is above the rate of return of the whole market. The rate of return of the whole market is measured by looking at the rates of return of a basket of equities that is representative of the whole market of equities. This basket consists of stocks of companies of different sizes and from different industry sectors from amongst the list of all companies traded in the capital market, say in the London Stock Exchange.

Using a formula that takes into account market capitalisation, historical share prices, and other considerations, the financial authorities determine which stocks to include. The stock prices of these stocks in the basket are mathematically added up to come up with the index that reflects the behaviour of the market as a whole. There are several indices formulated for the London Stock Exchange by an indexing company called FTSE International Ltd., an affiliate of the Financial Times Ltd., a U.K.-based firm.

Amongst the indices monitored by FTSE are the FTSE All-shares (688 stocks), FTSE 100 (102 stocks), FTSE 250 (250 stocks), and the FTSE SmallCap (336 stocks) indices (FTSE ASWB, 2005). At the end of each trading day, FTSE adds the prices of the stocks in each of these indices and then publishes the results.Under the assumption that the market is efficient and that it is not possible to beat the markets, an investor can decide to adopt an equity index strategy, which consists of buying a basket of stocks in the same proportion as they are included in the basket of stocks used to calculate an index.

Several fund management firms have made the job of investing easier by developing funds that

...Download file to see next pages Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“The Rationale of Equity Indexation Essay Example | Topics and Well Written Essays - 1000 words”, n.d.)
The Rationale of Equity Indexation Essay Example | Topics and Well Written Essays - 1000 words. Retrieved from https://studentshare.org/business/1499540-the-rationale-of-equity-indexation
(The Rationale of Equity Indexation Essay Example | Topics and Well Written Essays - 1000 Words)
The Rationale of Equity Indexation Essay Example | Topics and Well Written Essays - 1000 Words. https://studentshare.org/business/1499540-the-rationale-of-equity-indexation.
“The Rationale of Equity Indexation Essay Example | Topics and Well Written Essays - 1000 Words”, n.d. https://studentshare.org/business/1499540-the-rationale-of-equity-indexation.
  • Cited: 0 times

CHECK THESE SAMPLES OF The Rationale of Equity Indexation

Veolia Waters Business Model in China for its Long-Term Success

Foreign Enterprise Manage The JV Company with State Owned Background -Veolia Water's Business Model in China for Its Long Term Success Abstract The case study on Veolia Water joint venture in China revolves around the factors that are responsible for the successful management between the Chinese states owned organisations and the foreign companies....
82 Pages (20500 words) Dissertation

Affect of Impairment Testing and Off-Balance Sheet Liabilities on Reliability of Financial Statements

The main problems discussed in the essay "Affect Of Impairment Testing and Off-Balance Sheet Liabilities On Reliability of Financial Statements" are the international accounting standard board IASB are appropriately determining the fair value of an asset or liability.... hellip; To a greater extent one can see that the new accounting standards have helped to reduce the use of off-balance sheet liabilities....
7 Pages (1750 words) Essay

Canadian Intervening in the Agriculture Sector

There are policies that are implemented by the government and stakeholders; hence, establishing the rationale… In this case, after the long-standing tradition of stakeholders, there are chances of assuming the rational for government intervention in the On the other hand, a rationale requires healthy debate in the process of evolution concerning the operating conditions of the sector....
8 Pages (2000 words) Essay

Advanced HealthCare Management

Finally, the motivational theory that seeks goals and goal setting as the framework was noted to be proposed by Locke (1968) where goals were explicitly disclosed as powerful for the rationale that “they direct people's attention, focus efforts on tasks related to goal attainment, and encourage people to persist in such tasks” (Burns, Bradley, & Weiner, 2012, p.... The three approaches of motivation covered in Burns, Bradley, & Weiner (2012) are as follows: (1) the theory of work motivation which was described as assuming that “individuals value and seek fairness, or equity, in their relationship with employers (Adams, 1963, 1965)” (p....
2 Pages (500 words) Assignment

Trust and Equity - Knight v Knight

The latter had to hold the paintings for Diablo's sister Tiana.... Diablo expected Tiana to deliver the paintings to his brothers Pedro, Marco and Antonio.... Pedro was to have the first choice in… However, Pedro died prior to exercising his choice.... For assessing the validity of the trust, the following issues have to be considered. In Knight v Knight,1 the court stipulated that three elements have to be present for The first of these is the certainty of intention to create a trust....
7 Pages (1750 words) Essay

Equity and Trust

hellip; The author states that the invention of the Trust cannot in itself, be viewed as the ultimate achievement since there is a long history of established principles of equity that have been responsible for setting up the ideological framework of the law.... Starting from Plato and Aristotle, through Roman Praetorship and further into English Common law and the incorporation of equity, a set of rules and principles have been established by precedent laid out through the dictates of conscience of past adjudicators which have been the guiding principles of law down the ages and have made a much more valuable contribution in the legal arena....
12 Pages (3000 words) Assignment

The French Revolution: The Profession of Faith by Rousseau

The "The French Revolution: The Profession of Faith by Rousseau" paper focuses on "The Profession of Faith" where Rousseau attempts at analyzing God and Religion.... This passage is part of the Priest's introspection of what his duties are as a human being.... nbsp; … I agree with Rousseau that our outer senses are poor equipment for unraveling moral truths....
6 Pages (1500 words) Assignment

Secret Trust: Rationale Behind the Secret Trust

The Law of equity and trust confers the provision regarding trust.... equity enforces the settler's true intentions to benefit the third party even though this is contrary to the provisions of the Wills Act 1837, which was itself based on long-standing principles of the old Statute of Fraud 1677.... The paper "Secret Trust: rationale Behind the Secret Trust" examines the term "secret trust" and how law of trust dealt with it....
14 Pages (3500 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us