Index Investing: From Theory to Practice · Dr MAI Huu Minh, TRAN Phan Bao Ngoc & HUYNH Nguyen Quoc BuuChapter 3 of 37 · Module 1: Foundations
CHAPTER 3
The Mathematics of an Index
Weights, divisors, dividends and returns
Opening question
“A bank in the VN30 issued millions of new shares last week and its market value jumped. Why didn't the index jump with it?”
In this chapter
- The notation used throughout the book
- Price-weighted, market-value (Laspeyres), free-float and equal-weighted formulas
- Base dates, base values and the starting divisor
- Why the divisor changes, with worked examples for a stock split, a new share issue and a replacement
- Price, total-return and net-return indexes, with dividends reinvested on the ex-date
- Chain-linking and long index histories
- Simple and log returns, annualised return, volatility and drawdown
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This chapter is in the full book
Chapter 1 is free to read online. The full text of chapter 3 — with its tables, figures, worked examples and practice lab — is available in the complete edition of Index Investing: From Theory to Practice (Volume 1, NXW Investment Library).
Read Chapter 1 freeGet the full book — [email protected]Sections of this chapter
3.1 The notation
3.2 Price-weighted indexes
3.3 Market-value-weighted indexes
3.4 Free float and capping
3.5 Equal-weighted indexes
3.6 The divisor and why it changes
3.7 Price, total-return and net-return indexes
3.8 Chain-linking and long histories
3.9 Measuring index returns