Question 1:

Australia All ordinaries:

The All Ordinaries established in January 1980 is the Australian share index. It consists of all common shares listed on the Australian Securities Exchange (ASX)and represents the performance of Australia's top 500 listed companies, and was taken into effect On 3 April 2000. (“All Ords History”, n.d.)

The Australian financial sector has been the most dominant with an index weighting of 26.2%. the materials sector has an index weighting of 22.6%.(“Industry Sector”, n.d.)

Also to take into consideration the issue of performance and benchmarking, the ASX introduced six Benchmark Indices only designed to fulfil the needs of Fund Managers. These are:

ASX20

ASX50

ASX100

ASX200

ASX300

SMALL ORDINARIES

The Australian financial sector appears to be the most dominant with an index weighting of 26.2%. Given the utmost importance to historical data, all of the indices are calculated retrospectively, initially from 1992.(“All Ords History”, n.d.)

United States - Dow Jones Industrial Average

The US Dow Jones Industrials Average (DJIA) fell into effect on the 26 May 1896 by Charles Dow and is currently maintained by Dow Jones and Company it contains the overall stock performance of America's top thirty blue-chip companies that have a significant market capitalization of USD $3,190 billion. (“Index Investing :Dow Jones Industrial Average”, n.d.)

Basically the DJIA was the average of the stock prices, but today it used as a price- weighted system. The oil and gas industry is to be considered as the most dominant sector in DJIA. The industrial goods and services sector is slightly behind oil and gas in terms of index weighting. 3M and United Technologies Corporation have a combined index weighting of 10.46%. 3M and United Technologies Corporation were ranked second and sixth respectively in DJIA top ten holdings (“Index Investing: Dow Jones Industrial Average”, n.d.)

China - Shanghai Stock Exchange Composite Index

The Shanghai Stock Exchange (SSE) was established on 26th Nov, 1990 and started operations from the 19th of Dec the same year. It is also a membership institution directly governed by the China Securities Regulatory Commission(CSRC). The SSE's development is based on the principle of "legislation, supervision, self-regulation and standardization" to create a transparent, open, safe and efficient marketplace. (“Brief Introduction”,n.d.)

The main sectors are finance, real estate and construction, conglomerates, energy, services, utilities, consumer goods and materials (“Hang Seng Indexes”, n.d.).

In the past several years being in operation, the SSE has by far become the most superior stock market in Mainland China in relation to number of listed companies, number of shares listed, total market value, tradable market value, securities turnover in value, stock turnover in value and the T-bond turnover in value. The total market capitalization of SSE hit RMB 26.98 trillion. In 2007, Capital raised from SSE market surpassed RMB 661.6 billion.(“Brief Introduction”,n.d.)

Global Bonds- JP Morgan Global Bond Index

Global Bonds

Global Bonds is also known as a debt instrument issued for a period of more than one year and specifically not maturing before three years and after ten years with the purpose of of rasisng capital by borrowing.A bond issued and traded outside the country whose currency it is denominated in, and outside the specification of a country, usually a bond is issued by a non-European company for sale.(“Global bond”.n.d.)

JP Morgan Global Bond Index

J.P.Morgan's developed market indices include the local debt flagship products it also measures the total return from investing in 13 developed government bond markets - Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, UK, and US.(“ Tradeable Index Strategies: Fixed Income”,n.d.)

Developed Market indices-à I think that is the only index we need!!!

J.P.Morgan's developed market indices consists the local debt flagship products, the J.P.Morgan Government Bond Index (GBI) series and the Economic and Monetary Union (EMU) Government Bond Index.The developed markets index lineup has a long track record of investor adoption since the launch of the GBI Global in 1989, from that time ever since it expandedcoverage through the GBI Broad and the EMU Index. The indices track fixed rate assurances from high-income countries including the globe.(“Index Suite”.n.d.)

Question 2

General Trends:

Bull Market

A Bull market is basically the rising of stock prices, high economic growth, and strong investor confidence in the economy. A market participant who believes prices will move higher is called a "bull".Bull markets are movements in the stock market in which prices are rising and the outcome is that prices will continue moving upward. During this time, economic production is high, jobs are plentiful and inflation is low. (“Share Market Basics”.n.d.)

Bear Market

A Bear Market give us a overview that the economy is poor, recession is likely to occur, and stock prices are declining day by day, it reacts totally in opposite direction than a bull market. A bear market is into existence for an extended period of time when the share prices are going down. Investors are confused and are in a state of fear by anticipation of further losses and panic, selling of stocks which may result in a stock market crash and followed by recession. (“Stock Market Trends”.n.d.)

Similar Trend:

The global financial crisis disrupted the market in a similar way for each of the thee stock markets indices, which were in equal downfall position from the beginning of 2008 till March 2009. This affected almost all the countries and sectors in their own way, basically creating a situation of the “bear market”. Where the stock prices and stock indexes fell directly affecting the economy. The other way round?The global economy suffered immensely which affected the stock market trend as seen in table 2.1????

JP Morgan Global bond Trend:

Generally, the stocks and the bonds move in opposite direction to each other, so mainly bond are not really an interesting investment when stocks start to rally but bonds are on the other hand the safer investment. But when the financial crisis hit people could not get their money out of the stocks fast enough and put their money in safer securities like bonds.

When the credit crunch occurred during the mid of July 2008 the bonds had an upward movement as compared to the stocks as they were continuously falling and the bonds were rising.

Adding to the psychology part of this opposing trend is the Federal Bank as it dictates the interest rates. If the stock market takes off for example the Federal Reserve in this case is quick in increasing interest rates thus avoiding the economy to overheat. Simultaneously, an increase in interest rates makes borrowed money more expensive, which settles the growth to some extent. An increase in interest rates is not desirable for a bond holder. Since the coupon rate does not change, the current bond is suddenly worth less than a new bond with the new and increased interest rate.

An Investment into this market can depend on the age of a person to the needs and theamount of risk each individual is willing to take it can vary from 10% in a risk-averse market or even a 50/50 split between stocks or bonds.(“ Investing Strategies: Why Is Your Mix Of Stocks And Bonds So Important?”,n.d.)

à do we need that???

Question 3

Insert snapshots

Question 4

Types of Risk

Systematic Risk

That is a risk which influences a huge number of assets also known as non-diversifiable risk which takes it place effecting the economy in general with trends like (caused by…!!!) inflation rates, exchange rates, wars, political instability. These kinds of risk cannot be eliminated by diversification. It affects the global context.(“Risk and Diversification: The Risk-Reward Tradeoff”,n.d.)

Unsystematic Risk

Its a risk which is specific and is company, industry, market, economy or country oriented and also known as a diversifiable risk. The most common sections of risk in this situation are business risk and financial risk .The main framework for investment at this time would be investing in various assets, so that they do not get affected similarly during the market variations. (“Risk and Diversification: The Risk-Reward Tradeoff”,n.d.)

Country Risk do we need that, see country above

It's a risk which refers to the risk that a country is unable to honor its financial commitments. When a countryfails to honoron its obligations which then impacts directly on the performance of all other financial instruments in that country as well as other countries it has relations with. Country risk reefers to stocks, bonds, mutual funds, options and futures that are issued within a particular country. (“Risk and Diversification: The Risk-Reward Tradeoff”,n.d.)

Interest Rate Risk

It's a risk that affects the investment value of the capital with changes in interest rates. This risk affects the value of bonds in a more direct way compared to stocks as discussed above. (“Risk and Diversification: The Risk-Reward Tradeoff”,n.d.)

Market Riskdo wee need that, see market above

It's a risk which is very common in the market. It usually keeps into account the volatility of the market and the risk involved in the day to day trading methods. This risk is mainly applicable to stocks and options. (“Risk and Diversification: The Risk-Reward Tradeoff”,n.d.

As you can see, there are several types of risk that a smart investor should consider and pay careful attention to.

Dow Jones

Low:

The Dow Jones weekly returns saw a downfall swing at the beginning of the month in March 2009, with effect to the auto and home sales declining for general mortors making a situation of economic paralysis that was set in when Lehman Brothers failed. The other way round the stock market is affected by economic events!!!

This is an unsystematic risk which is company specific risk (Why???). country specific? It affected the whole Dow Jones!!!

Also affecting the Dow Jones Industrial Average fell 37.27 points, or 0.55%, to 6726.02, its fifth-straight decline and its eleventh in the past 13 sessions for its lowest close since April 21, 1997. (“US Stocks Close Lower; GE Drags DJIA To 12-Year Low”,2009)

High :

The Dow Jones saw an upward trend during the later half in the month of March 2009, affected by the rising share prices of the housing sector as well as the tech sector making it a unsystematic risk which is country specific (why??? We should elaborate why the housing sector and the tech sector have such a huge impact on the Dow Jones…maybe refer back to question 1?.(“Kramer, K”,2009)

All ordinaries:

Low:

As of January 2008, due to turmoil related to the US 2007 subprime mortgage financial crisis, the index had fallen 24 percent to 5,222.0 points. That was directly related to the US economy crisis affecting the All Ords index making a global impact and is therefore considered as a systematic risk.(“All Ords History”, n.d.)

High:

In November of 2008 the all ordinaries saw an upward trend when the Rudd government announced delivery of their first budget of the first stimulus package being worth 10.4 billion. This injection was a response to the global financial crisis, with the main objective being to fight inflation - a major problem in the local economy at the time. (“Australia's response to the global financial crisis - the first stimulus package“,n.d.) àreference (Author, date)

Thus making it an unsystematic risk being country specific. Do we talk about risks when there is a high???

Shanghai

High:

The Shanghai Stock Exchange Composite Index jumped by 16.4% in Nov of 2008 off its low after the Chinese government announced a $586 billion economic stimulus package (...).

Also, the Chinese trailing price-earnings multiple has fallen from 45.9 to 14.3 making it an unsystematic risk being country specific. (“Equities“,2008) àwhy is there a low explained???

Low:

In the beginning of January 2008 the Shanghai stock exchange saw a low which was dropping drastically as there were a lot of things taking effect at that time including the effects of the global financial crisis .Which not only affected this index but also affected the global market segment ,thus making it a systematic risk which cannot be diversified. (“The Financial Crisis Timeline”,n.d.)

JP Morgan Bond Index

Low and High :

The stocks and the bonds have an inverse relationship and move in opposite direction as discussed above. Thus the Global Bond index had an upward movement during the time of the stock market downfall. As seen in the graph the global bond index has seen inverse movements as compared to the stocks. The Federal bank did cut the rates when the stock market took a tumble. This means that a bond holder is very well off with his current bonds since it brings in more than a new bond would with new lower interest rates (…).

Thus creating a margin for the Federal Reserve to increase the interest rates making the borrowed money more expensive, indirectly making the growth steady and reasonable. This is considered as an systematic risk because of the interest rates thus making it non- diversifiable.(“ Investing Strategies: Why Is Your Mix Of Stocks And Bonds So Important?”,n.d.)

àWhat????? Other was round, Federal banks cuts interest rates when stock market falls because of economic crisis!!!

Question 5

Risk Return Tradeoff

The risk return trade off explains the concept of the amount of risk taken while investing and how comfortable you feel after investing are very important factors. In the market segment of investment and finance, risk/return relationship is considered to be very crucial and risk is basically measured by standard deviation. risk meaning the fear of losing some or partial or all of your investments.(“ Risk and Diversification: The Risk-Reward Tradeoff“,n.d.)

Low risk of uncertainty is generally associated with low potential returns. High risks of uncertainty are associated with high potential returns. Therisk/return tradeoff is the balance between the desire for the lowest possible risk and the highest possible return. This is demonstrated graphically in the chart below. A higher standard deviation means a higher risk and higher possible return.(“ Risk and Diversification: The Risk-Reward Tradeoff“,n.d.)

The risk/return tradeoff tells us that higher risk gives us thepossibilityof higher returns. There are no guarantees. Just as risk means higher potential returns, it also means higher potential losses.(“ Risk and Diversification: The Risk-Reward Tradeoff“,n.d.)

All Ords

Dow Jones

Shanghai Stock Exchange

JP Morgan Global Bonds

Maximum Return

0.110347766

0.067741381

0.119325508

0.114394867

Minimum Return

-0.13252932

-0.129351579

-0.16239406

-0.102126828

Average Return

-0.19432372%

-0.168107388%

-0.32315205%

0.15611655%

Standard Deviation

3.83335901%

3.214594739%

5.46759145%

3.02417420%

Coefficient of Variation

-19.72666496

-19.122269231

-16.919563159

19.37125935

Looking at the Summary table and specifically analyzing the standard deviation and average returns across indices the expectancy was to be that higher risk can leads to higher potential returns.

Looking at table 5.!? SSE had the highest standard deviation compared to the All Ords and Dow Jones; JP Morgan Global bonds has the lowest standard deviation reflecting the characteristics of the safer/low risk security as discussed above.

The Average return (standard deviation) for SSE was very high thus making it very inconsistent (was very low—>losses!!!). With higher risks came higher losses as compared to the All Ords and Dow Jones when the financial crisis hit. JP Morgan Global Bond was the only index to record a positive return during the Global financial crisis which again highlights the inverse relationship of stocks and bonds that occurred during the stock market downfall as discussed above with the chances of “Lower risks comes Lower losses”.(no loss, bond made profit!!!!) Thus, the relationship has been consistent across markets, making the market very volatile and unpredictable during the global financial crisis, hence creating the situation for “higher risks brings higher losses”.

Source: Essay UK - http://turkiyegoz.com/free-essays/finance/the-share-index.php


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