BANGABANDHU SHEIKH MUJIBUR RAHMAN

SCIENCE AND TECHNOLOGY UNIVERSITY,

GOPALGANJ-8100

Assignment on: Market Index/Indices

Course Title: Investment Analysis & Portfolio Management

Course Code: AIS451

Submitted by Supervised by
Name: Sadia Afroz Mim Name: Rabiul Islam
Student ID: 18AIS056 Assistant Professor
Year: 4th Semester: 2nd
Session: 2018-19 Dept. of Accounting & Information
Dept. of Accounting & Information Systems
Systems Bangabandhu Sheikh Mujibur Rahman
Bangabandhu Sheikh Mujibur Rahman Science & Technology University,
Science & Technology University, Gopalganj-8100, Bangladesh.
Gopalganj-8100, Bangladesh.

Date of Submission: 10 September, 2023

What is an index?

A stock market index tracks the ups and downs of a chosen group of stocks or other assets.
Watching the performance of a market index provides a quick way to see the health of the stock
market, guides financial firms in the creation of index funds and exchange-traded funds (ETFs),
and helps you gauge the performance of your investments.

What are the characteristics of index?

A market index is a numerical representation of the performance of a group of assets, such as

stocks, bonds, or other financial instruments. These indexes are widely used in the financial
industry to gauge the overall health and direction of a specific market or sector. Here are the key
characteristics of market indexes:

1. Selection of Components: Market indexes consist of a predefined set of components, such

as stocks or bonds, which are carefully chosen based on specific criteria. These criteria can
include market capitalization, sector, industry, or other factors depending on the index's
purpose.

2. Weighting Methodology: Market indexes can be weighted in different ways. Common

methods include market capitalization weighting (larger companies have a greater
influence), price weighting (based on the price of individual components), and equal
weighting (each component has the same impact).

3. Benchmarking: Market indexes are often used as benchmarks to assess the performance
of a particular market or asset class. Investors and fund managers use these benchmarks to
evaluate investment strategies and portfolio performance.

4. Calculation Frequency: Index values are typically calculated at specific intervals, such as
daily, weekly, or monthly, to provide up-to-date information on market performance.

5. Historical Data: Market indexes maintain historical data, allowing analysts and investors
to track trends and make comparisons over time. This historical data is useful for long-term
market analysis.

6. Diversification: Market indexes are designed to provide a diversified representation of the

market they track. Diversification helps reduce risk because it spreads exposure across
multiple assets.

7. Market Coverage: Some market indexes cover a broad market, such as the entire stock
market, while others focus on specific sectors, industries, or asset classes (e.g., technology
stocks, small-cap stocks, or bond markets).
 8. Exclusion Criteria: Indexes often have exclusion criteria to maintain the quality of their
components. This may include removing companies that no longer meet specific financial
or operational standards.

9. Calculation Method: The methodology for calculating index values is transparent and
follows a predefined set of rules. This ensures consistency and objectivity.

10. Dividend Reinvestment: Some market indexes include the reinvestment of dividends or
interest earned from the underlying assets, providing a more accurate representation of total
returns.

11. Float Adjustment: In stock market indexes, float-adjusted indexes consider only the
portion of a company's shares available for public trading, rather than the total outstanding
shares.

12. Sector Weighting: Some market indexes allocate a specific percentage of their
composition to different sectors or industries to reflect the market's overall structure.

13. Global or Regional Focus: Market indexes can be global, covering multiple countries and
regions, or they can be region-specific, focusing on a particular geographic area.

14. Transparency: Most market index providers offer detailed documentation that outlines
their methodology, components, and any changes made over time to maintain transparency.

15. Investable or Non-Investable: Some indexes are designed for investment products (e.g.,
exchange-traded funds or mutual funds) and are structured with components that can be
replicated by investors.

16. Tracking Instruments: Many financial products, such as index funds and exchange-
traded funds (ETFs), are created to track the performance of specific market indexes.

Market indexes play a crucial role in financial markets, providing investors with a standardized
way to measure and compare investment performance and market trends.

Types of Market index

Market indexes come in various types, each designed to measure and represent different aspects
of financial markets or specific asset classes. Here are some common types of market indexes:

1. Broad Market Indexes:

 These indexes aim to represent the overall performance of an entire market, such
as the stock market or bond market. Examples include the S&P 500 (U.S. large-cap
 stocks) and the Bloomberg Barclays U.S. Aggregate Bond Index (U.S. investment-
grade bonds).

2. Stock Market Indexes:

 Stock market indexes track the performance of a specific stock market or a segment
of it. Examples include the Dow Jones Industrial Average (30 major U.S.
companies) and the NASDAQ Composite (all companies listed on the NASDAQ
stock exchange).

3. Sectoral or Industry Indexes:

 These indexes focus on specific sectors or industries within an economy. Examples

include the Technology Select Sector SPDR Fund (tracks the technology sector in
the U.S.) and the S&P 500 Energy Index (tracks energy companies in the S&P 500).

4. Regional and Country Indexes:

 These indexes represent the performance of specific geographic regions or

countries. Examples include the FTSE 100 (UK), the Nikkei 225 (Japan), and the
MSCI Emerging Markets Index (emerging market countries).

5. Style Indexes:

 Style indexes categorize stocks based on their investment style, such as value or
growth. Examples include the Russell 1000 Growth Index (U.S. large-cap growth
stocks) and the MSCI World Value Index (global value stocks).

6. Size Indexes:

 These indexes group stocks by market capitalization, such as large-cap, mid-cap,

and small-cap. Examples include the Russell 2000 (U.S. small-cap stocks) and the
MSCI EAFE Small Cap Index (non-U.S. small-cap stocks).

7. Factor-Based Indexes:

 Factor indexes are constructed based on specific factors like value, momentum, or
low volatility. Examples include the MSCI USA Minimum Volatility Index and the
S&P 500 Dividend Aristocrats Index (companies with a history of increasing
dividends).

8. Commodity Indexes:

 Commodity indexes track the prices of various commodities, such as oil, gold, or
agricultural products. Examples include the S&P GSCI (tracks a wide range of
commodities) and the Bloomberg Commodity Index.
 9. Fixed-Income Indexes:

 Fixed-income indexes represent the performance of bond markets, often

categorized by factors like maturity, credit quality, or issuer type. Examples include
the ICE BofA U.S. Corporate Index (investment-grade corporate bonds) and the
Barclays U.S. Treasury Bond Index.

10. Real Estate Indexes:

 These indexes measure the performance of real estate investment trusts (REITs) or
real estate-related assets. Examples include the MSCI U.S. REIT Index and the
FTSE EPRA/NAREIT Global Real Estate Index.

11. Volatility Indexes:

 Volatility indexes, like the CBOE Volatility Index (VIX), measure market volatility
and investor sentiment. They are often used as indicators of market risk.

12. Custom or Specialized Indexes:

 Some indexes are created for specific purposes or themes, such as ethical investing
(e.g., MSCI ESG indexes), dividend-focused strategies, or smart beta strategies.

These are just a few examples of the many types of market indexes available. Each type serves a
unique purpose and provides valuable insights into different aspects of the financial markets,
helping investors make informed decisions and manage risk.

What Function Do Market Index Perform?

Market indexes perform several important functions in the world of finance and investing. These
functions provide valuable insights, benchmarks, and tools for various market participants,
including investors, fund managers, financial analysts, and policymakers. Here are the key
functions of market indexes:

1. Performance Measurement:

 Market indexes serve as benchmarks to measure the performance of a specific

market, asset class, or investment strategy. Investors use them to assess how their
portfolios are performing relative to the broader market.
2. Portfolio Management:

 Portfolio managers use market indexes as benchmarks to evaluate the performance

of their investment portfolios. They aim to outperform these benchmarks to
generate returns for their clients.

3. Asset Allocation:

 Investors use market indexes to make decisions about how to allocate their
investments across different asset classes, such as stocks, bonds, and cash. Indexes
help determine the optimal mix for achieving investment goals.

4. Risk Assessment:

 Market indexes provide insights into market volatility and risk. A rising volatility
index (e.g., VIX) may signal increased market uncertainty and the potential for
higher investment risk.

5. Investment Strategy:

 Traders and investors use market indexes to develop and implement various
investment strategies, such as passive investing (index tracking), factor investing
(e.g., value or growth strategies), and sector rotation.

6. Asset Selection:

 Indexes assist in the selection of individual assets for investment. Investors often
choose assets that are components of well-known indexes because they represent a
diversified set of securities.

7. Performance Evaluation:

 Financial analysts and fund managers use market indexes to evaluate the
performance of investment products, such as mutual funds and exchange-traded
funds (ETFs), by comparing their returns to those of relevant benchmarks.

8. Market Analysis:

 Market indexes provide data for analyzing market trends, sentiment, and investor
behavior. They help in assessing whether markets are in bull or bear phases and
identifying potential turning points.
 9. Risk Management:

 Investors and institutions use market indexes to hedge against market risk by taking
positions that move in the opposite direction of a particular index (e.g., using
futures contracts or options).

10. Asset Pricing:

 Indexes play a role in the pricing of financial derivatives, such as futures and
options contracts, as these often derive their value from underlying indexes.

11. Market Research:

 Financial researchers and academics use historical data from market indexes to
conduct empirical studies on various aspects of finance, economics, and investing.

12. Policy Decision-Making:

 Policymakers and central banks may monitor market indexes as economic

indicators to assess the health of the financial markets and the broader economy.

13. Investor Education:

 Market indexes are valuable tools for educating investors about different asset
classes, investment strategies, and market dynamics.

Overall, market indexes are essential tools that facilitate investment decision-making, risk
management, and performance evaluation in financial markets. They provide a common reference
point for assessing investment opportunities and monitoring market conditions.

For What Purpose Index Can Be Used?

Indexes are used in various fields and contexts for different purposes. Here are some common
purposes for which indexes can be used:

1. Information Retrieval: In libraries, books, and other repositories of information, indexes

are created to help users quickly locate specific information within a larger body of content.
For example, in a book, the index lists page numbers where specific topics, names, or
concepts are mentioned.

2. Database Management: In the context of databases, indexes are used to improve the speed
of data retrieval operations. They allow databases to quickly locate and access specific
rows of data, especially in large tables. This is crucial for efficient querying and reporting.
 3. Search Engines: Search engines like Google use indexes to quickly retrieve web pages
that match a user's search query. These indexes contain information about the content of
web pages, making it possible to rank and display relevant results.

4. Financial Markets: In financial markets, stock indexes like the S&P 500 or Dow Jones
Industrial Average are used to track the performance of a group of stocks, providing a
benchmark for investors to gauge market trends.

5. Economics: Economic indexes, such as the Consumer Price Index (CPI) or the Gross
Domestic Product (GDP) index, are used to measure changes in economic variables over
time, helping policymakers and analysts assess economic health.

6. Scientific Research: In scientific research, indexes are often used to quantify and compare
data. For example, the Human Development Index (HDI) measures and ranks the
development level of countries based on factors like life expectancy, education, and
income.

7. Performance Measurement: Companies use indexes to assess the performance of various

aspects of their business. Key Performance Indicators (KPIs) are a common example,
providing a way to measure and track progress toward specific goals.

8. Navigation: In maps and atlases, indexes are used to locate places or points of interest
quickly. They often include grid coordinates or alphabetical listings of locations.

9. Statistical Analysis: In statistics, indexes like the Consumer Confidence Index or the
Purchasing Managers' Index are used to gauge sentiment or activity levels in specific
sectors of the economy, helping analysts make predictions.

10. Academic Journals: Academic journals often have indexes that list articles by subject,
author, or keyword, making it easier for researchers to find relevant articles in a particular
field.

11. Web Development: In web development, search engines and content management systems
use indexes to speed up searches within websites, improving the user experience.

12. Bookkeeping: In accounting, indexes may be used to keep track of financial transactions,
making it easier to retrieve specific records or reconcile accounts.

These are just a few examples, and indexes are used in many other fields and contexts to organize,
retrieve, and analyze information efficiently. The specific purpose of an index depends on the
domain and the data it is designed to facilitate access to.
Real Life Examples of Market Index

Examples of the leading indices worldwide include:

 S&P 500 – The top 500 stocks in the USA

 Dow Jones Industrial Average – The top 30 stocks in the US

 Nasdaq Composite – All securities listed on the NASDAQ Exchange

 S&P 100 – The top 100 stocks in the USA

 Russell 1000 – The 100 highest-ranking stocks in the USA

 S&P 400 – The top 400 stocks in the USA

 Russell Mid-Cap – The smallest 800 company part of the Russell 1000

 FTSE 250 – The 101st to 350th largest stocks listed in the FTSE

Dhaka Stock Exchange (DSE)

The Dhaka Stock Exchange (DSE) is the principal stock exchange in

Bangladesh, playing a pivotal role in the country's economic
development and capital market since its inception. Established on
April 28, 1954, it has evolved over the years to become a vital
component of Bangladesh's financial landscape. Let's explore the
journey of the Dhaka Stock Exchange from its birth to the present day.
Total listed company is 652.

Background

Originally, the DSE was called the East Pakistan Stock Exchange Association Ltd. In 1962, the
name was revised to East Pakistan Stock Exchange Ltd., and two years later, the name again
changed to the current, Dhaka Stock Exchange Ltd.

The Dhaka Stock Exchange is registered as a Public Limited Company (PLC) and is regulated by
the Bangladesh Securities and Exchange Ordinance of 1969, the Companies Act of 1994
(Bangladesh) and the Bangladesh Securities and Exchange Commission (SEC) Act of 1993, which
established oversight for the Dhaka Stock Exchange.

As with the SEC in the United States, the Bangladesh SEC's responsibilities are broadly "to protect
the interest of investors in securities, develop the securities markets, and formulate rules on
securities related matters.
The Dhaka Stock Exchange trades in Bangladeshi taka, which is the currency of Bangladesh, and
whose official International Organization for Standardization (ISO) 4217 currency code is BDT.
The taka was issued in 1972, replacing the Pakistani rupee at a ratio of one to one. Companies
listed on the DSE are based primarily in Bangladesh. As of Oct. 13, 2021, the DSE’s market
capitalization in adjusted U.S. dollars was $67.11 billion.

The trading indices are DSE Broad Index (DSEX), DSEX Shariah Index (DSES), DSE 30 Index
(DS30), CDSET.

Functions of DSE

 The major functions are:

 Listing of Companies (As per Listing Regulations).

 Providing the screen based automated trading of listed Securities.

 Settlement of trading (As per Settlement of Transaction Regulations).

 Gifting of share / granting approval to the transaction/transfer of share outside the trading
system of the exchange (As per Listing Regulations 47).

 Market Administration & Control.

 Market Surveillance.

 Publication of Monthly Review.

 Monitoring the activities of listed companies (As per Listing Regulations).

 Investor’s grievance Cell (Disposal of complaint bye laws 1997).

 Investors Protection Fund (As per investor protection fund Regulations 1999).

 Announcement of Price sensitive or other information about listed companies through

online.
Why List with DSE?

 DSE is premier bourse of the country.

 DSE offers companies a recognized listing and capital raising venue.

 DSE provides deepest market liquidity available in the country.

 You can unlock your potential with more than 500 listed securities.

 DSE is committed to ensure orderly and fair markets and that risks are managed prudently,
consistent with the public interest and, in particular, the interests of the investing public.

 DSE is able to offer a transparent and well-regulated market for companies of all types and
sizes to list their shares.

 Investors can also participate in the growth of both local and foreign companies listed on
our Exchange in the confident knowledge that they are investing in a market that meets
international standards.

 DSE provides efficient trading platform designed developed by NASDAQOMX and

FlexTrade.

 Simple and clear requirements for listings.

 Cost effective listing destination

 Swift time-to-market.

 Cost effective listing destination.

 Strong investor protection regime under a sound regulatory framework

 Transparent and fully automated marketplace

Methods of Listing

There are two possible ways to get listed with DSE:

1. Listing through Initial Public Offer (IPO)

 fixed price method, when offered at par value

 book-building method, when offered above par value

2. Offloading of Shares through direct listing

Chittagong Stock Exchange (CSE)

It is one of the twin financial hubs of the country, alongside the Dhaka Stock Exchange.
Established in 1995, the exchange is located in the Agrabad business district in downtown
Chittagong. Number of Listed Companies: Annual data was reported at 342.000 Unit in 2023. This
records an increase from the previous number of 332.000 Unit for 2022. CSE: Number of Listed
Companies: Annual data is updated yearly, averaging 207.000 Unit from Jun 1997 to 2023, with
27 observations.

Index Methodology

Index is a statistical measure of change in an economy or

a securities market. A stock index or stock market index
is a measurement of the value of a section of the stock
market. It is computed from the prices of selected stocks
(typically a weighted average). It is a tool used by
investors and investment analysts to describe the market,
and to compare the return on specific investments.A
stock market index is a number that indicates therelative
level of prices or value of securities in a market on a
particular day compared with a base-day figure, which is
usually 100 or 1000. There are many different ways of constructing an index. One of the most
common methods is illustrated by the following simple example:

The values of a market portfolio at the close of trading on Day 1 and Day 2 are recorded below:

Tk. 20,000 1000

Tk. 30,000 1500

We take Day 1 as the base day. The index on that day will be taken as a standard. The value
assigned to the base day index is 1000 in this example. On Day 2, the value of the portfolio has
changed from Tk. 20,000 to Tk. 30,000, a 50% increase. Therefore, the value of the index on Day
2 will change to indicate a corresponding 50% increase in market value. The computation follows
the procedure below:

Day 2's portfolio value

Day 2's index =-------------------------------------------- * Base Day's index

Base Day's portfolio value

Tk. 30,000

= --------------------- * 1000
 Tk. 20,000

= 1500

Day 2's index is 1500 as compared to the 1000 of day 1.

The above illustration only serves as an introduction to how a particular index is constructed. The
daily computation of an index is more involved especially when there are changes in market
capitalization of constituent stocks, e.g., right offers, stock dividend etc. The primary objective of
constructing market indices is to measure the performance of the market. The indices provide vital
information about the current and historical behavior of the market. At present, Chittagong Stock
Exchange Limited (CSE) is managing several indices which are listed below:

• CSE All Share Price Index (CASPI)

• CSE Selective Categories Index (CSCX)

• CSE30 Index

• CSE50 (Benchmark Index)

• CSE Shariah Index (CSI) and

• Sector Wise Indices

All the indices of the CSE are calculated and maintained following Laspeyres Method which was
considered as the most transparent and scientific at the time of its inception. To adopt a modern
and internationally accepted calculation methodology to provide a more sensitive, investable,
tradable and transparently managed Index; CSE has been following Free Float Methodology of
index construction since the year 2013. The constituents are free float adjusted with only the
investable portion included in the index calculation.

Globally, the Free-Float Methodology of index construction is considered to be an industry best

practice and all major indexes like MSCI, FTSE and S&P have adopted the same. MSCI, a leading
global index, shifted all its indices to the Free-float Methodology in 2002. Free-float Methodology
refers to an index construction methodology that takes into consideration only the free-float market
capitalization of a company for the purpose of index calculation and assigning weight to stocks in
the Index. Free-float market capitalization takes into consideration only those shares issued by the
company that are readily available for trading at the Stock Exchange. It generally excludes
promoters' holding, government holding, strategic holding and other locked-in shares that will not
come to the market for trading in the normal course.
Background

The Chittagong Stock Exchange (CSE) began its journey in 10th October of 1995 from Chittagong
City through the cry-out trading system with the promise to create a state-of-the art bourse in the
country.

Founder members of the proposed Chittagong Stock Exchange approached the Bangladesh
Government in January 1995 and obtained the permission of the Securities and Exchange
Commission on February 12, 1995 for establishing the country's second stock exchange. The
Exchange comprised of twelve Board members, presided by Mr. Amir Khosru Mahmud
Chowdhury (MP) and run by an independent secretariat from the very first day of its inception.

What Is High-Frequency Trading (HFT)?

High-frequency trading (HFT) is a trading method that uses powerful computer programs to
transact a large number of orders in fractions of a second. HFT uses complex algorithms to analyze
multiple markets and execute orders based on market conditions. Traders with the fastest execution
speeds are generally more profitable than those with slower execution speeds. HFT is also
characterized by high turnover rates and order-to-trade ratios.

Advantages & Disadvantages of HFT

Advantages of High Frequency Trading:

 HFT can provide liquidity to the markets by making it easier for buyers and sellers to find
each other.

 HFT can make the markets more efficient by reducing the spread between the bid and ask
price.

 HFT can help to make prices more accurate by creating more competition among market
makers.

Disadvantages of High Frequency Trading:

 HFT can create volatile conditions in the markets by causing sudden price changes.

 HFT can make it difficult for long-term investors to trade successfully.

 HFT can give an unfair advantage to traders who have access to better technology and
information.
Portfolio Management Model

Portfolio management refers to the art of managing various financial products and assets to help
an individual earn maximum revenues with minimum risks involved in the long run. Portfolio
management helps an individual to decide where and how to invest his hard earned money for
guaranteed returns in the future.

1. Capital Asset Pricing Model

Capital Asset Pricing Model also abbreviated as CAPM was proposed by Jack Treynor, William
Sharpe, John Lintner and Jan Mossin.

When an asset needs to be added to an already well diversified portfolio, Capital Asset Pricing
Model is used to calculate the asset’s rate of profit or rate of return (ROI).

In Capital Asset Pricing Model, the asset responds only to:

Market risks or non-diversifiable risks often represented by beta

Expected return of the market

Expected rate of return of an asset with no risks involved

Where is Capital Asset Pricing Model Used?

Capital Asset Pricing Model is used to determine the price of an individual security through
security market line (SML) and how it is related to systematic risks.

What is Security Market Line?

Security Market Line is nothing but the graphical representation of capital asset pricing model to
determine the rate of return of an asset sensitive to non-diversifiable risk (Beta).

SML: E(Ri) = Rf + βi[E(Rm) – Rf]

2. Arbitrage Pricing Theory

Stephen Ross proposed the Arbitrage Pricing Theory in 1976.Arbitrage Pricing Theory highlights
the relationship between an asset and several similar market risk factors.

According to Arbitrage Pricing Theory, the value of an asset is dependent on macro and company
specific factors.
 3. Modern Portfolio Theory

Modern Portfolio Theory was introduced by Harry Markowitz.

According to Modern Portfolio Theory, while designing a portfolio, the ratio of each asset must
be chosen and combined carefully in a portfolio for maximum returns and minimum risks.

In Modern Portfolio Theory emphasis is not laid on a single asset in a portfolio, but how each asset
changes in relation to the other asset in the portfolio with reference to fluctuations in the
price.Modern Portfolio theory proposes that a portfolio manager must carefully choose various
assets while designing a portfolio for maximum guaranteed returns in the future.

4. Value at Risk Model

Value at Risk Model was proposed to calculate the risk involved in financial market. Financial
markets are characterized by risks and uncertainty over the returns earned in future on various
investment products. Market conditions can fluctuate anytime giving rise to major crisis.

The potential risk involved and the potential loss in value of a portfolio over a certain period of
time is defined as value at risk model.

Value at Risk model is used by financial experts to estimate the risk involved in any financial
portfolio over a given period of time.

5. Jensen’s Performance Index

Jensen’s Performance Index was proposed by Michael Jensen in 1968.Jensen’s Performance Index
is used to calculate the abnormal return of any financial asset (bonds, shares, securities) as
compared to its expected return in any portfolio.Also called Jensen’s alpha, investors prefer
portfolio with abnormal returns or positivealpha.

Jensen’s alpha = Portfolio Return – [Risk Free Rate + Portfolio Beta * (Market Return – Risk Free
Rate)

αj = Ri – [Rf + βim * (Rm – Rf)]

6. Treynor Index
Treynor Index model named after Jack.L Treynor is used to calculate the excess return earned
which could otherwise have been earned in a portfolio with minimum or no risk factors involved.

Where T-Treynor ratio is-

T = (ri – rf) βi