1. Today (and continued next week Wednesday if we don’t finish all this today):  Turn in your signed syllabus last page.  Divide up the portfolio’s securities for monitoring.  Discuss your ideas on how you plan to “Alert” yourself for your securities.  Discuss what constitutes something important enough to email the class (and me).  Discuss the most 2 important performance measures the Regents ask about (total return and active return).  Discuss how active return is measured versus our benchmark (the S&P 500 index).  Discuss total return of the S&P 500 index versus return excluding dividends.  Do a quick review of indices (aka indexes) and who uses them (besides us).  Build a spreadsheet of the benchmark S&P 500 constituents and weights. (Save the spreadsheet to use for Assignment 1.)  Use a pivot table to quickly compare our sector weights to the benchmark’s?  We’ll look at what’s in and not in the index? (Energy sector example.)  We’ll see how important “value weights” are in portfolios versus the benchmark. (An example of how many equity portfolio managers lost money by underweighting, then overweighting Apple.) I’ll post instructions for your first assignment tomorrow by midnight; Due Monday beginning of class January 26. 1

2. Some data Total return = (ending value + dividends – starting value) / (starting value). Active return = Regents’ portfolio total return – S&P 500 total return. Link to S&P 500 total return index historical data: http://ycharts.com/indices/%5ESPXTR 2 December 31, 2014 January 9, 2015Total Return Regents’ Portfolio $2,672,780.87 S&P 500 Total Return Index Active Return

3. 3 ‘...everybody talks about them, but few people understand them…’ They are used: 1.To summarize market activity 2.To benchmark performance 3.To create index portfolios, ETFs and mutual funds 4. As explanatory factors in risk measurement models and other empirical studies S&P 500 INDEX DOW JONES INDUSTRIAL AVERAGE Indices

4. 4 Indices: Three Weighting Methods A price weighted index is proportional to the sum of the constituent prices (e.g. DJIA) – (  Price per share)/Divisor – Biased towards high price stocks A value weighted index is proportional to the sum of total capitalizations (e.g., S&P500) –  ( Price per share × Number of shares) – Biased toward large market value companies An equal weighted (aka unweighted) index cumulates equal weighted average returns: –  (% change in Price) / Number of companies – More numerous smaller companies are more important in this type of index than with the other 2 types

5. 5 Price Weighted (Example) Dow Jones Industrial Average (DJIA): – Thirty large cap stocks: – High price stocks carry more weight than low price stocks. – High growth companies with stock splits lose relative importance, thus downward bias. – For stock splits, they adjust divisor downwards to compensate. (instead of 30, divisor is much less now to adjust for past stock splits and composition changes.) 9/24/2010 DJIA

6. 6 Value Weighted (e.g., S&P 500) Most stock market indices are calculated this way. Uses market value weights: Price per share × Number of Shares Outstanding for each company (some use float instead of outstanding, publicly available shares). Changes in large cap stocks (high market value) are relatively more important.

7. 7 Unweighted / Equal Weighted The arithmetic average of the percentage changes in price for all stocks in index. Equivalent to investing the same $ amount in each stock, then rebalancing each period. An equal weighted (unweighted) index is biased towards the returns of smaller companies relative to a value weighted index because small companies are quite numerous.

8. Let’s build a spreadsheet of the S&P 500 constituents and weights. (Please save the spreadsheet to use for Assignment 1.) We’ll use data available at: http://www.sectorspdr.com/sectorspdr/sector/xlp 8