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An assignment on

I Index and its methodII DSEX and DGEN

Course Title:Financial Engineering

Course Code: FNB405

Submitted to

Mr. Nafeez Al TariqCourse Instructor

Submitted byTanima Sarker (Student ID: 594)BBA, Batch - 02

Department of Finance and Banking

Jahangirnagar University

Savar, Dhaka-1342

13thJune, 2014

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Index: Index is a statistical measure of change in an economy or a securities market. In the case of

financial markets, an index is an imaginary portfolio of securities representing a particular market or a

portion of it. Each index has its own calculation methodology. Stock and bond market indexes are used

to construct index mutual funds and exchange-traded funds whose portfolios mirror the components of

the index. Example: DSEX, NASDAQ Composite etc.

Types of Index:

Based on Types Sub Types Definition

ROA

Price Return

Indices

- It uses only the prices of the constituent securities in

the return calculation.

Total Return

Indices

- It uses both the price of and the income from the

index securities in the return calculation.

Types of

Assets

EquityIndices

Broad Market Index Represent the majority of stocks in a market.

Multi Market Index Contain the indexes of several countries.

Multi Market Index

with Fundamental

Weighting

Uses market capitalization weighting for the country

indexes but then weights the country index returns in

the global index by a fundamental factor.

Sector Index Measures the returns for an industry sector like health

care.

Style Index Measures the returns to market capitalization and

value or growth strategies.

Fixed Market

Indices

Broad Market Index Fixed income securities vary widely with respect to

their coupon rates, ratings, maturities, and embedded

options such as convertibility to common stock.

Sector Index

Other Specialized

Index

Indices for

Alternative

Investment

Real Estate

Investment Trust

(REIT) index

It is constructed using returns based on appraisals of

properties, repeat property sales, or the performance

of (REITs).

Commodity index Represent futures contracts on commodities.

Hedge fund index It invests in nontraditional assets, using leverage and

both long and short positions.

Index weighting methods:

Based On PriceWeighting

Index

Equal Weighting

IndexMarketCapitalization

Weighting

Fundamental

Weighting

Definition

adds the market

prices of each stockin the index and

divides this total by

the number of stocks

in the index

places an equal

weight on thereturns of all index

stocks, regardless

of their prices or

market values

each components of

stocks contribute itsmarket value to

determine the index

value

Based on

fundamentalmetrics such as

revenue, dividend

rates, earnings or

book value

Formula Wi= Pi Pi Wi= 1 N Wi= Qi*Pi(Qi*Pi) Wi= Fi Fi

Advantage Simple to calculate Simplicity Simple to rebalance Independent of

securities price

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Disadvantage Arbitrary change in

weight mainly in case

of stock split and

price change

Requires frequent

adjustment.

heavily influenced

by the few

companies with the

largest market

capitalizations

Overweight stocks

have higher

earning yield and

underweight

stocks have lower

earning yield

Methods of creating Index

Number of Indices in DSE: The Dhaka Stock Exchange presently computes two indices

a. DSE Broad Index (DSEX)b. DSE 30 Index (DS30).

DSEX and its construction methodology: The DSEX, developed by Standard and Poor's, was formally

launched on January 28, based on the free-float method used by the world's major indices. It is the DSE

Broad Index and it reflects around 97% of the total equity market capitalization. Eligible stocks in DSEX

must have a float adjusted market capitalization above 100 million BDT. Stocks must have a minimum

six-month ADVT of 1 million BDT as of the rebalancing reference date. At each annual rebalancing, if a

current index constituent falls below 1 million BDT, but is no less than 0.7 million BDT, then the stock

remains in the index provided it also meets the other eligibility criteria. In addition, all eligible stocks for

the DSE indices are required to trade at least half of normal trading days each month for the three

months prior to the rebalancing reference date. Financial viability is not required for index membership.

DGEN Vs. DSEX: DGEN is the DSE general index. It is the previous DSE index. DGEN followed full market

capitalization where DSEX followed free float method. DGEN includes all the share outstanding but DSEX

excludes locked-in shares held by promoters and governments. DGEN have 12 years historical data

where DSEX have 5 years historical data. For DGEN, 2001 was the base year and for DSEX 2008 is the

base year.

Problems of DGEN: DGEN contains inflated points due to faulty calculation. Many investors found it

confusing and providing misleading information. The flawed computation of the index first came to light

following the debut of Grameenphone on the stock market in November 2009 when the then key index

of the bourse, DGEN, gained more than 700 points in a single day. It was introduced at November 24,

2001 and discontinued at August 01, 2013.

Benefits of DSEX: On January 28, 2013, DSE launched DSEX. It uses free float methodology. Marketcapitalization under the free-float methodology is calculated by taking the equity's price and multiplying

it by the number of shares readily available in the market. It removes the flaws in calculation process. It

provides better understanding to the investors.

Measuringtarget

marketindex

Includingsecurities

from targetmarket

Appropriateweighting

method

Rebalancingthe index

Reconstitutethe index