Index Fever

1. Index Fever Taxonomy of Indices Relationship Between Broad Market Indices

2. Broad (US)Equity Indices: DJIA, SP500,Value Line 1700, Russell 3000, Wilshire 5000 Market Indices: NYSE Composite, NASDAQ Comp., FT100, Nikkei 225 Technical Indicators: PREM, TICK, ARMS, Industry Indices: SOX, MSH, BKX, DJTRAN, DJUTIL, XOI Equity Market Sectors size: small, “mid-cap”, large value: growth, value International (from US view) developed markets: e.g. MSCI’s EAFE for Europe, Australia, Far East “Emerging” Markets: less developed markets ex: Barings Emerging Markets Index includes Korea and Taiwan Equity Futures and Options Indices MMI (XMI) & SP100 (OEX) Taxonomy of Equity Indices

3. Broad Equity Market Returns

5. Weights are “capitalization weights”: capitalization = price X number of shares The Frank Russell Company takes all 6,000 traded stocks and ranks them by market cap. Russell excludes cross-ownership in the evaluation of market cap. (In US about 5% of equity is double counted. One firm owning shares of another.) Russell excludes ADR’s (these are not US equity) The Russell 3000 is the top 3,000 stocks by market capitalization. Russell claims it represents 98% of investible US Equity market, or $13.2 trillion as of 6/99 The top 1,000 stocks in the Russell 3,000 are used for the Russell 1000 The next 2,000 stocks are used for the Russell 2,000 Russell 3000 (Total Cap = $13.2 Trillion) avg. mkt cap = $4.4 billion median mkt cap = 701.7 million largest weight = 407.1bill/13.2 Trillion = .031 smallest weight = 178.2million/13.2Trill =.00001 Russell 1000 (Total Cap = $12.1 Trillion) avg. mkt cap = $12.1 billion median mkt cap = 3.8 billion largest weight = 407.1bill/12.1 Trillion = .034 smallest weight = 1.4 billion/12.1Trillion =.00011 Russell 2000(Total Cap = $1.05Trillion) avg. mkt cap = $ 526.4 million median mkt cap = 178 million largest weight = 1.4billion/1.05Trillion = .00129 smallest weight = 178million/1.05Trillion=.00017 Some Details about the Russells

6. Comparison of Market Values from June 1997 to June 1999 June 1997 • Russell 3000: Total Cap = $8.4 trillion • avg. mkt cap = $2.8 billion • median mkt cap = 639 million • largest weight = 198bill/8.4 Trillion = .024 • smallest weight = 172 million/8.4Trill =.00002 • Russell 1000: Total Cap = $7.6 trillion • avg. mkt cap = $7.6 billion • median mkt cap = 3.0 billion • largest weight = 198bill/7.6 Trillion = .026 • smallest weight = 1.1 billion/7.6Trillion =.00015 • Russell 2000: Total Cap = $934 billion • avg. mkt cap = $ 467 million • median mkt cap = 395 million • largest weight = 1.1billion/934billion = .00118 • smallest weight = 172 million/934billion =.00018 June 1998 $11.1 trillion $3.7 billion 793.3 million = 271.6bill/11.1 Trillion = .024 = 221.9million/11.1Trill =.00002 $9.9 trillion $9.9 billion 3.7 billion = 271.6bill/9.9 Trillion = .027 1.4 billion/9.9Trillion =.00014 $1.2Trillion $ 592 million 395 million = 1.4billion/1.2Trillion = .00116 = 221.9million/1.2Trillion=.00018 June 1999 $13.2 Trillion $4.4 billion 701.7 million = 407.1bill/13.2 Trillion = .031 = 178.2million/13.2Trill =.00001 $12.1 Trillion $12.1 billion 3.8 billion = 407.1bill/12.1 Trillion = .034 = 1.4 billion/12.1Trillion =.00011 $1.05Trillion avg. mkt cap = $ 526.4 million median mkt cap = 178 million largest weight = 1.4billion/1.05Trillion = .00129 smallest weight = 178million/1.05Trillion=.00017

7. TOTAL RETURNS ON BROAD MARKET INDICES • Data: SP500 296 months: January 1975 to August 1999 SP1500 105 months: December 1990 to August 1999 Wishire5000 296 months: January 1975 to August 1999 R1000 248 months: January 1979 to August 1999 R3000 248 months: January 1979 to August 1999 • Correlation: SP500 SP1500 W5000 R1000 R3000 SP500 1 SP1500 .996 1 W5000 .986 .995 1 R1000 .996 .998 .998 1 R3000 .992 .995 .995 .998 1

9. Regression Results • Using the data ending in August 1999: W5000 = -.00014 + 1.015 SP500 R2 = .976 n = 296 (t = -.34) (t = 110.1) R1000 = -0.000279 + 1.007 SP500 R2 = .991 n = 248 (t = -1.025) (t =167.6) R3000 = -0.000518 + 1.013 SP500 R2 = .983 n = 248 (t = --1.35) (t = 111.6) SP1500= -.00010 + 1.0022 SP500 R2 = 0.992n = 105 (t = -.28) (t = 111.8)

10. Our Claim: There is no difference in these indices. Prove us wrong! Suppose you are working for a money management firm that is not sure whether we are right. Your assignment is to investigate our claim and specifically answer the question: Can you use statistics to show that the indices are different? Steps in the assignment Step1:Download the spreadsheet MarketIndices.xls from the course website. Step 2: There are monthly returns on the SP500, the Russell 1000 and the Russell 3000 from January 1979 to November 2000. Step 3: Use alt-tools-data analysis- regression to run the regression of the broad market indices on each other. (If “data analysis” is not available, use alt-tools-add ins to add analysis tool pack and analysis tool pack VBA, to get the data analysis menu item on alt-tools) Hint: The standard evaluation period in the money management business is 36 months ending on a quarter (March, June, Sept, Dec.). Examine sub-periods to determine if there is a difference. Step 4: Email your spreadsheet to charles@trzcinka.com . If your spreadsheet is too disorganized to read we will give it a low grade. If it has a virus attached, we’ll give it an “F” grade.