【优质】solution manual for investment analysis and portfolio management ch05.docVIP

CHAPTER 5 SECURITY-MARKET INDICATOR SERIES Answers to Questions 1. The purpose of market indicator series is to provide a general indication of the aggregate market changes or market movements. More specifically, the indicator series are used to derive market returns for a period of interest and then used as a benchmark for evaluating the performance of alternative portfolios. A second use is in examining the factors that influence aggregate stock price movements by forming relationships between market (series) movements and changes in the relevant variables in order to illustrate how these variables influence market movements. A further use is by technicians who use past aggregate market movements to predict future price patterns. Finally, a very important use is in portfolio theory, where the systematic risk of an individual security is determined by the relationship of the rates of return for the individual security to rates of return for a market portfolio of risky assets. Here, a representative market indicator series is used as a proxy for the market portfolio of risky assets. 2. A characteristic that differentiates alternative market indicator series is the sample - the size of the sample (how representative of the total market it is) and the source (whether securities are of a particular type or a given segment of the population (NYSE, TSE). The weight given to each member plays a discriminatory role - with diverse members in a sample, it would make a difference whether the series is price-weighted, value-weighted, or unweighted. Finally, the computational procedure used for calculating return - i.e., whether arithmetic mean, geometric mean, etc. 3. A price-weighted series is an unweighted arithmetic average of current prices of the securities included in the sample - i.e., closing prices of all securities are summed and divided by the number of securities in the sample. A $100 security will have a greater influence on the series than a $25 security because