Today: We’ll finish up some things from week #1.  Do a quick review of indices (aka indexes) and who uses them (besides us).  Build a spreadsheet of the benchmark S&P 500 constituents and weights.  We’ll look at what’s in and not in the S&P 500 index?  We’ll see how important “weights” are in portfolios versus the benchmark. (An example of how many equity portfolio managers lost money by underweighting, then overweighting Apple.) 1

2 ‘...everybody talks about them, but few people understand them…’ They are used: 1.To summarize market activity 2.To benchmark performance 3.To create index portfolios, ETFs and mutual funds 4. As explanatory factors in risk measurement models and other empirical studies S&P 500 INDEX DOW JONES INDUSTRIAL AVERAGE Indice s

3 Indices: Three Weighting Methods A price weighted index is proportional to the sum of the constituent prices (e.g. DJIA) (  Price per share)/Divisor Biased towards high price stocks A value weighted index is proportional to the sum of total capitalizations (e.g., S&P500)  ( Price per share × Number of shares) Biased toward large market value companies An equal weighted (aka unweighted) index cumulates equal weighted average returns:  (% change in Price) / Number of companies More numerous smaller companies are more important in this type of index than with the other 2 types

4 Price Weighted (Example) Dow Jones Industrial Average (DJIA): Thirty large cap stocks: High price stocks carry more weight than low price stocks. High growth companies with stock splits lose relative importance, thus downward bias. For stock splits, they adjust divisor downwards to compensate. (instead of 30, divisor is much less now to adjust for past stock splits and composition changes.) 9/24/2010 DJIA

5 Value Weighted (e.g., S&P 500) Most stock market indices are calculated this way. Uses market value weights: Price per share × Number of Shares Outstanding for each company (some use float instead of outstanding, publicly available shares). Changes in large cap stocks (high market value) are relatively more important.

6 Unweighted / Equal Weighted The arithmetic average of the percentage changes in price for all stocks in index. Equivalent to investing the same $ amount in each stock, then rebalancing each period. An equal weighted (unweighted) index is biased towards the returns of smaller companies relative to a value weighted index because small companies are quite numerous.

Instructions State Street Bank and Trust Company has created 9 Select SPDR ETFs. These 9 sector ETFs together can be used to replicate the S&P 500 index. (The Regents’ portfolio holds all 9.) We’ll use information about them to construct the S&P 500 holdings and weights. We’ll use information available at: An example spreadsheet for the S&P 500 as of Sept. 9, 2014 is available at:

Which of the Regents’ portfolio holdings are under-weighted or over- weighted? How much impact does a 10% change in a stock price have on the portfolio’s active return? Company NameTickerWeight % in Regents Portfolio Weight % in the S&P 500 Benchmark Delta = Weight% in Regents Portfolio – Weight% in Benchmark % Change in total value of Regents Portfolio if stock increases 10% % Change in total value of Regents Portfolio if stock decreases 10% Chevron CVX Nasdaq NDAQ NetflixNFLX Continental Res.CLR Apple AAPL