Indices mindbending poser......

theknifemac

Well-known member
340 0
TheBramble said:
I'm still not so sure.

I've attached the rules for calculating the index which I pulled off the FTSE site.

If you look at rule 3.2 it mentions the divisor saying "the divisor is [then] adjusted when capitalisation amendments are made to the constituents of the index...".

Which is exactly (in your example) you were saying HADN'T occurred - no changes to cap.

So my original position still stands. If the divisor is only adjusted to "...allow the index to remain comparable over time" and no change to constituent market cap has occurred - it should be the same in the examples used above.
The Bramble

I've not looked at the document yet, but I think it is talking about the situation when a company in the index has a stock split or share issue. The FTSE Index is designed to track the value of companies in the index, and the divisor is used to adjust the index with the new constituents so it gives off the previous days closing prices the same index value as the old constituents had.

Sections 6.3.1 covers this (though on the subject of shares issues, where the index level should be unchanged due to changes in shares in issue.

In fact read 6.4.1 and that pretty much covers it :p
"When a company is added to or deleted from the index, the market capitalisation of that company is added to or deleted from the index and the total marker capitalisation will rise or fall accordingly. The index divisor is adjusted to maintain a constant index value."

It goes on to give an example.

You have to remember that the index shows the performance of the top 100 or so companies ranked by market capitalisation with rules in place for when stocks enter and leave the index. By definition higher market capitalisation stocks will replace lower cap stocks, but the index level is unchanged when the additions occur.

Stew
 

theknifemac

Well-known member
340 0
hjk said:
I knew it wasn't THAT simple !


Another way of saying it is that the index is NOT a direct indicator of total market capitalisation of the 100 constituents.......correct? .................or not?

academic maybe but interesting never-the-less.................

It IS a direct indicator of the total market cap of stocks WHEN they are in the index. You are confusing changes that occur when the stocks are outside the index....

Stew
 

Rognvald

Established member
916 15
Tony
Have you thought of trying apply the laws of thermodynamics to this little problem?

"Energy exists in many forms, such as heat, light, chemical energy, and electrical energy. Energy is the ability to bring about change or to do work. Thermodynamics is the study of energy.

First Law of Thermodynamics: Energy can be changed from one form to another, but it cannot be created or destroyed. The total amount of energy and matter in the Universe remains constant, merely changing from one form to another. The First Law of Thermodynamics (Conservation) states that energy is always conserved, it cannot be created or destroyed. In essence, energy can be converted from one form into another.

The Second Law of Thermodynamics states that "in all energy exchanges, if no energy enters or leaves the system, the potential energy of the state will always be less than that of the initial state." This is also commonly referred to as entropy. A watchspring-driven watch will run until the potential energy in the spring is converted, and not again until energy is reapplied to the spring to rewind it. A car that has run out of gas will not run again until you walk 10 miles to a gas station and refuel the car. Once the potential energy locked in carbohydrates is converted into kinetic energy (energy in use or motion), the organism will get no more until energy is input again. In the process of energy transfer, some energy will dissipate as heat. Entropy is a measure of disorder: cells are NOT disordered and so have low entropy. The flow of energy maintains order and life. Entropy wins when organisms cease to take in energy and die."
 
 
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