vietnam national university, HANOI
school of business Nguyen Minh Khoi A STUDY ON SECTOR INDEX OF STOCK MARKET
PROPOSAL FOR DEVELOPMENT OF
FPTS SECTOR INDEX
master of business administration thesis
Code: 60 34 05
Master of business administration thesis

Supervisors:
1. DR. TRAN doan Kim
2. Tran Phuong Lan, MBA, Ph.D candidate

Hanoi - 2008
iv
TABLE OF CONTENTS
ABSTRACT i
TÓM TẮT ii
ACKNOWLEDGEMENTS iii
TABLE OF CONTENTS iv
List of figures viii
List of tables viii
List of equations ix
INTRODUCTION 1
1.1. Research problem 1
1.2. Objectives &Aims 1
1.2.1. Objectives 1

1.2.4. Hedge economic risk 9
1.2.5. Sector investing 10
1.2.5.1. Increase returns and reduce the overall risk of a diversified portfolio . 10
1.2.5.2. Take advantage of long-term trends 10
1.3. Sector indices calculation 11
1.3.1. Step 1: Calculation methods 11
1.3.1.1. Passcher method 11
1.3.1.2. Laspeyres method 12
1.3.1.3. Fisher method 12
1.3.1.4. Simple arithmetic price average 13
1.3.1.5. Simple geometric price average method 13
1.3.1.6. Comparison of index calculation method 14
1.3.2. Step 2: Members selection 14
1.3.3. Step 3: Divisor adjustment 15
1.3.3.1. Reasons for divisor adjustment 15
1.3.3.2. Divisor adjustment formula 16
1.3.3.3. Timing of divisor adjustments 17
1.3.4. Step 4: Index calculation 18
Chapter 2: ANALYSIS OF SECTOR INDICES 19
2.1. Analysis of international sector indices 19
2.1.1. S&P select industry indices 19
2.1.1.1. Index Description 19
2.1.1.2. Sector classification system 19
2.1.1.3. Index membership 19
2.1.1.4. Index calculation 21
2.1.2. Dow Jones U.S. Industry Indices 22
2.1.2.1. Index description 22
2.1.2.2. Sector classification system 22
2.1.2.3. Index membership 23
vi

2.2.4.1. Index description 46
2.2.4.2. Index Membership. 46
2.2.4.3. Index calculation 47
2.2.5. SSI 30 Index 48
2.2.5.1. Index description 48
2.2.5.2. Index membership and calculation 49
vii
2.2.6. Local indices comparison 50
2.2.7. Drawbacks of local indices 52
2.2.7.1. Drawbacks of VN-Index and HASTC index 52
2.2.7.2. Additional drawbacks of other local index 54
Chapter 3: PROPOSAL FOR DEVELOPING FPTS SECTOR INDEX 55
3.1. Introduction and Objectives 55
3.2. Methodology 55
3.2.1. Sector classification system 55
3.2.2. Base value and base date 56
3.2.3. Weighting scheme 56
3.2.4. Index formula 56
3.2.5. Data sources 57
3.3. Index memberships 58
3.3.1. Index eligibilities 58
3.3.2. Additions to and deletions from FPTS sector indices 59
3.3.2.1. Additions to FPTS sector indices 59
3.3.2.2. Deletions from FPTS sector indices 60
3.3.3. Member selection flowchart 61
3.4. User requirement description (URD) 62
3.4.1. Back-end user requirements 62
3.4.2. Front –end user interface and functionalities 62
3.4.2.1. Page layout and elements 63
3.4.2.2. Prototype of FPTS sector index homepage 64

Equation 1.2: Laspeyres method formula 12
Equation 1.3: Fisher method formula 13
Equation 1.4: Simple arithmetic price average formula 13
Equation 1.5: Simple geometric price average formula 13
Equation 1.6: Index calculation formula 18
A study on sector index of stock market - proposal for development of FPTS sector index
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INTRODUCTION
1.1. Research problem
One of the most widely used tools to track industry or sector
performance in the securities market is sector indices. These are the essential
tools for investors to follow up sector movements as well as to see the trend in
those movements. However, the securities market of Vietnam still lacks of an
comprehensive and effective sector indices tools since the official market
indices of the securities market of Vietnam (VN-Index and HASTC-Index)
are to measure the overall market performance rather than any particular
sector. This thesis ―A study on sector index of stock market and proposal for
development of FPTS sector index‖ is aimed at give out a detailed proposal
for the development of FPTS sector indices.
1.2. Objectives &Aims
1.2.1. Objectives
 Study sector index definitions.
 Study sector index application and calculation methodology.
 Compare and analyze most known international and local sector
indices.
1.2.2. Aims
Give out detailed proposals for the development of FPTS sector index
family.
A study on sector index of stock market - proposal for development of FPTS sector index
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This research presents clearly and systematically the theory of sector
indices. This theory is good references and can be applied to develop new
indices for any enterprises or organizations.
On the practice, it gives a detailed proposal to develop FPTS sector
indices for FPT Securities Company including both methodology, back-end
and front-end design and functions. This is a good example and reference for
any new sector indices.
1.9. Limitations
1. The first limit of this research is from case study method. This method
cannot cover all the theoretical issues of sector indices.
2. Another limit of this research is the choices of indices for analysis.
Although these are the most known sector indices but the number of
cases is limited. In addition, all of local indices are just introduced
recently, and thus, the data may not be sufficient.
1.10. Expected result:
The study expects to show the following findings:
A study on sector index of stock market - proposal for development of FPTS sector index
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 Bring systematic knowledge about indices and sector indices
 Provide a deep analysis of popular international and local sector indices
 Develop a detailed proposal of FPTS sector indices for FPT Securities
Company. This proposal can also be considered as a specimen for other
new sector indices
1.11. Follow – up (potential)
Further study can also be carried out to fine-tune the backend functions
and front-end user interface and functions after the official launch of FPTS
sector indices and receiving the feedbacks from FPTS clients.
1.12. Short introductions
Due to the standardized thesis format and for the sake of clarity, after
the introduction to its topic, this thesis is divided into three chapters as

prices of securities available in the market including stock, bond,
derivatives (Important note: in the context of this thesis, the term “market
index” is also referred to as “securities market index” and can be used
exchangeably). A market index is designed to measure price changes of an
overall securities market. A sector index is a market index which is designed
to measure the performance of a distinct industry sector.
1.1.2. Type of market indices
Over time, many indices have been created, maintained and improved
by financial institutions in the world. Indices can be classified by many
characteristics of indices. These characteristics groups indices into groups for
the purpose of classification. These characteristics include but not limited to:
1. Sector or industry of index members
A study on sector index of stock market - proposal for development of FPTS sector index
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2. Geographic location: where the members of indices resides
3. The nature of index members: whether they are equity, bond or
commodity
4. Market capitalization or size of index members
5. Style (value or growth) of index members
6. Dividend payout ratio of its stock members
1.1.2.1. By industry (Sector indices)
When in an index includes all (or representatives) stocks of an industry
or sector, that index is a sector index and measures the performance of its
industry sector.
1.1.2.2. By geographic location
 Global indices: include a set of investable equities around the globe that
track the performance of the global equity market.
 Regional indices: track the performance of regional equity markets
such as North America, Europe, Asia Pacific or Europe.
 National indices: track the performance of the equity market in a single

aggregate price changes of all of the stocks which make up that sector and, as
a result, measures the price direction or volatility of the particular sector.
A study on sector index of stock market - proposal for development of FPTS sector index
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Sector indices are updated frequently throughout each trading day so that
trends in market price movements can be quickly seen, thereby enabling
trading decisions (i.e. buy, sell or hold at any particular time) to be made
expeditiously
1.2.2. Creation of index-linked investment products
Data and insights from a particular sector are inputs to support the
creation of index-linked investment products such as mutual funds and
derivatives etc.
1.2.3. Precise asset allocations
Because there are distinct indices for each investment style, investors
could determine the corresponding portfolio risks and make precise asset
allocations accordingly.
1.2.4. Hedge economic risk
Just like stocks, each sector has its own characteristics. For example,
certain sectors can be characterized as defensive or cyclical in nature.
Defensive sectors are less affected by recessions and economic adversity. The
utilities sector (gas, electricity) is considered defensive as demand for this
sector is stable and independent of the state of the economy. Conversely,
cyclical sectors (for example the consumer discretionary sector which
includes goods like automobiles and refrigerators etc) generate high profits in
a prosperous economy but low profits as the economy degrades. Besides,
certain sectors are more interest-rate sensitive than others (such as financial
services, banking, real estate and construction).
A study on sector index of stock market - proposal for development of FPTS sector index
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Therefore, recognizing these sector characteristics enables investors to

1.3.1.1. Passcher method
This is a weighted average index in which the weighting factor is the
number of share outstanding in the period of calculation. Passcher is the most
popular method and also referred to as market capitalization weighted index.
Equation 1.1: Passcher method formula

In which: I
p
: Passcher market price index
P
t
: Price at the time of t (reporting period)
P
0
: Price at the base time (t =0)
Q
t
: Quantity (weighting factor) at the time of calculation (t)
The indices KOSPI (Korea); S&P500(USA); FT-SE 100 (Britain) ;
TOPIX (Japan) ; CAC (France); TSE (Taiwan); Hangseng (Hong Kong);
A study on sector index of stock market - proposal for development of FPTS sector index
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Swish indices,… and Vn-Index and HASTC-Index of Vietnam apply this
method.
1.3.1.2. Laspeyres method
This is a weighted average index with the weighting factor is the number
of share outstanding in the period of calculation.
Laspeyres price average index is a weighted average index in which the
weighting factor is the number of share outstanding in the base period.
Consequently, the calculation result depends on the proportion of outstanding

I
p
: Passcher average price index
I
l
: Laspeyres average price index
In theory, this method is available, but in fact, no country has applied
this method.
1.3.1.4. Simple arithmetic price average
Beside the above methods, the simple arithmetic average price index is
also popular. The formula is simple: the total sum of stock price is divided by the
number of stocks included
Equation 1.4: Simple arithmetic price average formula

In which: I
p
: simple arithmetic price average
P
i
: price of stock i
n: number of stock included in the index
The Dow Jone index family of the USA, Nikkei 255 of Japan, and MBI of
Italia apply this method. This method is appropriate when the price of stocks
listed is relatively near one another or in other word; their standard deviation ()
is low.
1.3.1.5. Simple geometric price average method
Equation 1.5: Simple geometric price average formula
A study on sector index of stock market - proposal for development of FPTS sector index
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indices are replaced by more representative ones. For example, in November,
1999, four members of DJIA were replaced.
As for Vietnam or any emerging market, since the number of stock
listed has not been large, the market index should include all listed stocks.
However, the trading quantity and volume should also be taken into account.
If one stock has no trading or every limited quantity for a long time, it should
be expelled from the index. The purpose of that action is to make sure that the
index can reflect the fair movement of the market prices
1.3.3. Step 3: Divisor adjustment
1.3.3.1. Reasons for divisor adjustment
During the continuous calculation of a sector index, some factors that
change the quantity and value of stocks will affect the continuity of the index.
The factors include inclusion, exclusion of index members, replacement of
index members, stock split or merger, stock dividend, cash dividend,
additional issuance, stock warrant, stock price adjustment on ex-right
date….To negate for distortions caused by those factors so that the average
price index only reflects the changes in stock price, the index divisor
adjustment is needed.
The following formula will be used for divisor adjustments due to
corporate action. (Note: No divisor adjustments are necessary for stock splits,
since market capitalization does not change and the share number and share
price are adjusted prior to the opening of trading on the split’s ex-date)
A study on sector index of stock market - proposal for development of FPTS sector index
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1.3.3.2. Divisor adjustment formula
Whenever a corporation implements an action that affects its stocks
(such as dividend payment, stock split or rights offering etc.), the divisor
needs to be adjusted upwards, downwards or remain the same. Assuming
stockholders receive ―B‖ new stocks for every ―A‖ stocks they own in the
following corporate actions:

t
*(A+B)/A
3
Issuance of
additional shares at
discount prices to
existing
shareholders)
P
t+1
=(P
t*
A +subscription
price *B)/(A+B)
Q
t+1
= Q
t
*(A+B)/A
4
Purchase of treasury
stocks
No change
Q
t+1
= Q
t
– no. of
treasury stocks bought
5

stock dividend
Pt+1=(Pt-cash
dividend)*A/(A+B)
Qt+1= Qt*(A+B)/A
9
Cash dividend and
rights offering
Pt+1=[(Pt-cash
dividend)*A+subscription
price *B]/(A+B)
Qt+1=Qt*(A+B)/A
10
Stock dividend and
rights offering
Pt+1=(Pt*A+subscription
price*C)/(A+B+C)
Qt+1=Qt*(A+B+C)/A
A study on sector index of stock market - proposal for development of FPTS sector index
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No
Corporate action
Adjusted price (P
t+1
)
Adjusted outstanding
shares (Q
t+1
)
11
Cash dividend and