Sector and Style Indexes

If an investor wants to purchase financial assets in a specific industry, he or she can refer to __sector indexes.__ Sector indexes are industry specific, such as energy, finance, health care, technology, etc. Sector indexes can be tracked on a national, regional, or global basis. Suppose Jeff Nicholson, an investor, has a portfolio comprised of two sectors—50% technology and 50% healthcare. All companies he's invested in are headquartered in the United States with operations overseas. He does not plan on expanding his portfolio into other industries, such as energy or consumer goods. What type of sector indexes should Jeff follow?

Not quite. There is no need for Jeff to look at global indexes in either industry, unless he has intentions of expanding his portfolio.

Incorrect. Jeff does not necessarily need to look at global indexes, as the companies he's invested in are headquartered nationally.

Recall, Jeff's portfolio is comprised of two sectors—50% healthcare and 50% information technology. He does not plan on expanding his portfolio into other industries, such as energy or consumer goods. Jeff decides he will weigh his portfolio at 66% healthcare and 34% technology. Which of the following projections might Jeff make, considering the weights he assigned to his portfolio?

Incorrect. Assigning weights in this example is not correlated with the riskiness of securities within Jeff's portfolio.

Incorrect. A weight percentage within a portfolio does not determine the same percentage as a return.

Sector indexes can determine whether an investor is successful at selecting stocks, sectors, or both. Suppose Jeff's technology stocks had a 9% return for the quarter. The overall technology market return was 11% for the same quarter. Which is the likely case of Jeff's portfolio?

Incorrect. Jeff's technology stocks had a return of 9%. A negative return would indicate loss of value.

Incorrect. An investor would not say his or her stocks did very well if the portfolio underperformed the index standard.

Absolutely. Since the index Jeff watches is closely related to his portfolio, it would indicate some of the stocks he has in his portfolio performed well below the index, and some stocks did okay.

Absolutely! Since Jeff's entire portfolio is comprised of US headquartered companies, he will only need to look at domestic sector indexes. Like any other index, there can be weighted sector indexes. Industries behave differently over its business cycle.

__Style indexes__ represent categorized groups of securities. The categories include __market capitalization__, __value/growth classification__, or a combination of the two. _Market capitalization_ styles are broken down into large cap, midcap, and small cap. For instance, a market-capitalization style index *could* be comprised of the following: companies with market caps greater than USD 100 million are large cap, companies with USD 1 million to USD 100 million are midcap, and companies with less than USD 1 million are small cap. However, many indexes actually define the market cap ranges differently. _Value/growth classification_ style indexes are based on factors such as high dividend yields, low price-to-earnings ratios, etc. __Market capitalization and value/growth classification__ is a combination of the two categories above. Just like the vehicle that featured both safety and fuel efficiency, this style measures a combination of two features that intrigue investors.

There are six basic style index categories that fall under combining market-capitalization groups with value and growth: large-cap value, large-cap growth, mid-cap value, mid-cap growth, small-cap value, and small-cap growth. Valuation ratios and market caps change over time. This may entail certain stocks traveling to another style index category. Which of the following scenarios may allow a security to change from one style index category to another?

Absolutely! A dividend yield is a valuation ratio an index uses to measure its stocks. Therefore, a higher dividend yield could imply an increase in growth or value of an organization.

Not quite. A stock that performs below a specific index will not indicate a shift in categorization of style.

Incorrect. A company that buys back its own stock to increase the company's value will not indicate a shift in style categorization.

To summarize: [[summary]]

Great. The higher the weight in a portfolio, the higher the influence it has in the portfolio. Likewise, the higher the weight in an index, the higher the influence it has on the given market.

National technology and national healthcare

National healthcare and global technology

National and global indexes for both healthcare and technology

He projects his health care securities are nearly half as risky as his technology securities

He projects health care will bring nearly double the returns technology will

He projects the health care industry will have nearly double the influence on his portfolio

A lot of Jeff's technology stocks did very well, although they did not meet the index standards

Jeff must have some technology stocks that performed well below the index

Jeff lost portfolio value by not paying close enough attention to the index's portfolio

A stock that increased its value through share repurchases

A stock that performed well below its index the previous quarter

A stock that moved from an average dividend yield to a high dividend yield

Continue

Continue

Continue

Continue

Continue