5/30/2023

Security
Market
Indexes
Dr. Mahmoud Otaify
Assistant Professor of Finance

Why we need Security Market Indexes?

To be a benchmark to
To compute total returns
judge the performance of To create an index
and risk measures for an
professional money portfolio and ETF
aggregate market
managers.

To be used as a proxy for

To be used as proxies for
For predicting future the market portfolio of
the aggregate stock or
market movements by risky assets when
bond market in Economic
technicians calculating the systematic
studies
risk of an asset

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INVESTING IN SECURITY “if you can’t beat them, join them.”

MARKET INDEXES

Index Mutual funds Exchange-Traded Funds

fund manager will typically attempt to replicate the portfolio of securities is placed on deposit at a financial
composition of the particular index exactly institution, which then issues a single type of certificate
representing ownership of the underlying portfolio

low trading and management expense ratios

Advantage: smaller management fee, the ability for
continuous trading while markets are open
Advantage: inexpensive way for investors to acquire a
diversified portfolio

ETF disadvantages include the brokerage commission

Disadvantage: investors can only liquidate their and the inability to reinvest dividends
positions at the end of the trading day

DIFFERENTIATING FACTORS IN
CONSTRUCTING MARKET INDEXES

• the sample should be representative of the total

Sample population; otherwise, its size will be meaningless

• The weight given to each member in the sample:

Weighting • (1) a price-weighted index,
• (2) a market-value weighted index,
Sample Members • (3) an unweighted index,
• (4) a fundamental weighted index

Computational • To take a simple arithmetic mean of the various

members in the index
Procedure • To use a geometric mean of the components

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Examples of Egyptian Stock Indexes

Base date Methodology Constituents Weighting Method
EGX30 1998 liquidity and activity 30 Stocks Market capitalization and
adjusted by the free float

EGX 30 CAPPED 2003 liquidity and activity 30 Stocks Maximum weight of any
constituent is 15%

EGX50 EWI 2013 liquidity and activity 50 Stocks Equally weighted index
EGX 70 2008 liquidity and activity 70 Stocks Price Index
EGX 100 2006 liquidity and activity 100 Stocks Price Index
S&P/EGX ESG 2007 highest ESG scores and 30 stocks
liquidity
SMES INDEX 2012 26 stocks Market capitalization and
adjusted by free float

Sector Indices 2007 Only companies traded variable Free-float market

with no price limits capitalization weighted
indices

Prepared by Dr. Otaify Financial Portfolio MGT - Dr. M. Otaify 5

What are weighting method used

to stock market indexes?

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Price-weighted index
A price-weighted index is an arithmetic mean of current stock
prices, which means that index movements are influenced by
the differential prices of the components.

where:
• 𝑃 = closing price of stock i on day t
• D divisor on day t
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Price-weighted index – Example

Suppose a stock exchange has an official index which contains only three stocks; W, Y,
Z. The index is calculated according to the price weighting method. One day, the prices
are 8, 11 and 22 for the stocks W, Y, Z respectively. Second day prices are 7, 12, 24
respectively.

The index value for the first day = (8+11+22)/3 = 13.67 points
The index value for the second day = (7+12 +24)/3 = 14.33 points
The change in index value = new value – old value = 14.33 – 13.67 = 0.66 points
The change in index value = new value – old value /old value = (14.33 – 13.67)/13.67 =
4.83%
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Effect of Stock Split on Index calculation

Suppose that Egyptian stock A B C D E
Stocks
exchange index contains only
5 stocks. Price behavior of
these stocks is shown in the Sunday 8 38 12 27 88
following table.
Monday 6 42 5 29 86
Stock C was split on Monday
and its value became 6.
Tuesday 6 41 4 28 87
Calculate the Index value for
the three days?
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Sunday • The index value =

𝟔 𝟒
= 33.4 points

Monday
( ∗𝟐)
• The index value = = 34.6 points
• New divisor (D)= = 4.86
.

Tuesday • The index value =

points
.
=34.15

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Value-Weighted Index

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Value-Weighted Index – Example

Beginning index value = 100

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Value-Weighted Index – Example Solution

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Adjustment for Stock Split

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Adjustment for Stock Split

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