International Benchmark Factors

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janakisri

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Match the following , then explain to yourself what they mean
Factors to consider in choice of International benchmarks:
Pro Con
Objectivity & Transparency Index Reconsititution Effects
Liquidity+Crossing Opportunity Rebalancing Costs
Precise Float Adjustment Judgement
Breadth Investability
 
Objectivity & Transparency - Judgement
Liquidity+Crossing Opportunity - Index Reconsititution Effects
Precise Float Adjustment - Rebalancing Costs
Breadth - Investability
?
 
1. Breadth and Investability (higher investability usually means lower breadth or coverage)
2. Precise Float Adjustment and Rebalancing Costs (Having a higher degree of precision to float adjustments will also increase costs)
3. Objectivity and transpaerency and Judgement (Having objective rules for reconstitution vs subjective judgement. SP 500, heavily followed index, has subjective rules which makes it harder for a manager to know when changes will happen, and there iwll be higher price pressure once a change does occur because everyone following it implements after the fact, instead of being able to do it before the fact)
4. Liquidity + Corssing and Index Reconstitution effect (Higher liquidity and crossing is desired, but this indexes are more heavily followed so reconstitution effects have more price and market impact when there are changes)
 
I would guess:
Objectivity & Transparency -> Judgment (more objectivity = less judgment)
Precise Float Adjustment -> Investability (more accurate float measure = more accurate measurement of how much of a company is actually investable rather than held closely out of the market)
Liquidity+Crossing -> Rebalancing Costs (more liquidity = less TCs)
Breadth -> Index Reconstitution Effects (no idea. I think breadth means the amount of potential candidates, so I would think higher breadth means higher chance of index reconstitution. I just chose this because the other 3 made sense to me).
Eh, on second thought, I can see how Breadth would better match up to investability, which would mean float precision either matches up to rebalancing costs or index reconstitution. I’m pretty confident about the rebalancing costs matching up to liquidity+crossing, so I guess Floating Precision matches up to Index Reconstitution effects somehow?
 
Im 99% sure my answer above is correct…this is straight from Schweser, except the bolded pice at the end.
  • Large coverage (breadth of the index) versus the costs of investing in a large number of securities, some of which may be illiquid. BREADTH VS INVESTABILITY
  • Liquidity of popular indices versus the cost of altering a portfolio tracking a popular index every time the index is reconstituted. LIQUIDITY VS RECONST COSTS
  • Making a precise float adjustment versus the cost of reconstituting a portfolio that is tracking an index that makes precise float adjustments. PRECISE FLOAT ADJ VS TRANS COSTS
  • Investing in a popular index, which offers the highest liquidity versus the cost of lack of objectivity in construction of the index. OBJECTVIE VS SUBJECTIVE
 
Your above answer makes sense - thanks for the explanation. Damn, there’s more to this subject than I realized.
 
yea, this looks like prime material for an item set where two people discuss and you have to say if they are right or wrong, or a short answer asking you to name a few of the pros and cons of intl benchmarks
 
Spanish and L3 are right of course and nashwbe is dead on , about the things hiding in little nooks and crannies that can come out and bite
 
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