MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) INDEXES BASIC INFORMATION AND TUTORIALS

What Is The Morgan Stanley Capital International Indexes?

The Morgan Stanley Capital International Indexes is consist of 3 international, 19 national, and 38 international industry indexes.

The indexes consider some 1,375 companies listed on stock exchanges in 19 countries with a combined market capitalization that represents approximately 60 percent of the aggregate market value of the stock exchanges of these countries.

All the indexes are market-value weighted. Exhibit 5.10 contains the countries included, the number of stocks, and market values for stocks in the various countries and groups.

In addition to reporting the indexes in U.S. dollars and the country’s local currency, the following valuation information is available: (1) price-to-book value (P/BV) ratio, (2) price-to-cash earnings (earnings plus depreciation) (P/CE) ratio, (3) price-to-earnings (P/E) ratio, and (4) dividend yield (YLD).

These ratios help in analyzing different valuation levels among countries and over time for specific countries.

Notably, the Morgan Stanley group index for Europe, Australia, and the Far East (EAFE) is being used as the basis for futures and options contracts on the Chicago Mercantile Exchange and the Chicago Board Options Exchange.  

USES OF SECURITY MARKET INDEXES BASIC INFORMATION

Security market indexes have at least five specific uses. A primary application is to use the index values to compute total returns and risk for an aggregate market or some component of a market over a specified time period and use the rates of return and risk measures computed as a benchmark to judge the performance of individual portfolios.

A basic assumption when evaluating portfolio performance is that any investor should be able to experience a risk-adjusted rate of return comparable to the market by randomly selecting a large number of stocks or bonds from the total market; hence, a superior portfolio manager should consistently do better than the market.

Therefore, an aggregate stock or bond market index can be used as a benchmark to judge the performance of professional money managers. Indicator series are also used to develop an index portfolio.

As we will discuss later, it is difficult for most money managers to consistently outperform specified market indexes on a risk adjusted basis over time. If this is true, an obvious alternative is to invest in a portfolio that will emulate this market portfolio.

This notion led to the creation of index funds, whose purpose is to track the performance of the specified market series (index) over time. The original index fund concept was related to common stocks.

Subsequently, development of comprehensive, well specified bond market indexes and similar inferior performance relative to the bond market by most bond portfolio managers have led to a similar phenomenon in the fixed-income area (bond index funds).

Securities analysts, portfolio managers, and others use security market indexes to examine the factors that influence aggregate security price movements (that is, the indexes are used to measure aggregate market movements).

Another group interested in an aggregate market series is “technicians,” who believe past price changes can be used to predict future price movements. For example, to project future stock price movements, technicians would plot and analyze price and volume changes for a stock market series like the Dow Jones Industrial Average.

Finally, work in portfolio and capital market theory has implied that the relevant risk for an individual risky asset is its systematic risk, which is the relationship between the rates of return for a risky asset and the rates of return for a market portfolio of risky assets.

Therefore, in this case, an aggregate market index is used as a proxy for the market portfolio of risky assets. In summary, security market indexes are used:

➤ As benchmarks to evaluate the performance of professional money managers

➤ To create and monitor an index fund

➤ To measure market rates of return in economic studies

➤ For predicting future market movements by technicians

➤ As a proxy for the market portfolio of risky assets when calculating the systematic risk of an asset.

THE DOW JONES INDUSTRIAL AVERAGE BASIC AND TUTORIALS

THE DOW JONES INDUSTRIAL AVERAGE BASIC INFORMATION
What Is The Dow Jones Industrial Average?


Wall Street has several ways to keep track of the market. One of the easiest ways to find out how the market is performing each day is to look at a newspaper, television, or the Internet.

Typically, people look at the Dow Jones Industrial Average (DJIA), the most popular method of determining whether the market is up or down for the day.

The Dow Jones Industrial Average
In 1884, a reporter named Charles Dow calculated an average of the closing prices of 12 railroad stocks; this became known as the Dow Jones Transportation Average. His goal was to find a way to measure how the stock market did each day. He then wrote comments about the stock market in a four-page daily newspaper called a “flimsie,” which later became the Wall Street Journal.

A few years later, the company Charles Dow helped start, Dow Jones, launched the Dow Jones Industrial Average, consisting of 12 industrial stocks. If you know about averages, you know that you basically add up the prices of the stocks in the index and divide by the number of stocks to create a daily average.

By watching the Dow, you can get a general idea of how the market is doing. It also gives us clues to the trend of the market, whether it is going up, down, or sideways. (The trend is simply the direction in which a stock or market is going.)

The original 12 stocks in the Dow were the biggest and most popular companies at the end of the nineteenth century—for example, American Tobacco, Distilling and Cattle Feeding, U.S. Leather, and General Electric, to name a few. Guess which stock still remains in the index? (If you guessed General Electric, you are right. The other corporations either went out of business or merged with other corporations.)

By 1928, the Dow Jones Industrial Average was increased to 30 stocks, which is the number of stocks in the index today. (By the way, this index is sometimes called the Dow 30.) These 30 stocks are a cross section of the most important sectors in the stock market. (A sector is a group of companies in the same industry, such as technology, utilities, or energy.)

Over time, the Dow changed from an equal-weighted index to one in which different stocks have different weights. This means that stocks with a higher weighting affect the Dow index more than stocks with a lower weighting.

For example, since American Express is weighted high in today’s market, if this stock is having a bad day and falls by several points, the Dow could end up down for the day. It’s easy to find out how the Dow did each day—it’s reported in the media.

Since more than half of the public is invested in the stock market, there is a lot of interest in what the Dow does each day. Therefore, when we talk about the Dow Jones being up or down each day, we’re really talking about a representative group of 30 stocks, the Dow 30.

Even if the market is down for the day, the stock you own could be up, or the other way around.