On Stock Market Index Methodology

OnStockMarketIndexMethodology:
UsingPrincipalComponentAnalysisas
BasketSelectionCriterion
}eiic C. Biiones
Nelloney Baye F. Awit
E} Rannel Chiistian B. Nanalang

In paitial fulfillment foi the uegiee
Nastei of Applieu Nathematics
majoi in Nathematical Finance

Naich 2u1S

Nathematics Bepaitment
Ateneo ue Nanila 0niveisity

Nopartofthispapermaybereproducedwithoutpermissionfromthe
authorsand/ortheAteneodeManilaMathematicsDepartment.

Awit, Briones, Manalang i
M AMF 2012-2013 On Stock Market Index Methodology

ABSTRACT

Cuiiently, the Philippine Stock Exchange has eight inuices. Bowevei, these inuices uo not
captuie much infoimation iegaiuing the stock maiket anu the listeu stocks. Also, most of
the selection ciiteiia cuiiently useu uo not have statistical basis. In light of the neeu to have
an inuex oi an inuex methouology that is moie objective, while encapsulating moie
infoimation iegaiuing the maiket, a ieview of ielateu liteiatuie points out to using
piincipal component analysis.

This papei examines an inuex methouology with piincipal component analysis as the basic
basket selection ciiteiion foi the Philippine stock maiket. New inuices that woulu pioviue
moie infoimation to the investois will also be suggesteu using financial measuies.
Specifically, beta coefficients, sustainable giowth iate, BE anu PE iatios, anu R0E woulu
be useu as auuitional selection ciiteiia to captuie moie infoimation about the stocks.

Baseu on the iesults of the analysis, this papei concluues that, while the inuices aie easiei
to unueistanu, able to captuie moie infoimation iegaiuing the maiket anu the stock, anu
offei highei log ietuins, they aie ielatively moie volatile compaieu to the cuiient inuices.

Awit, Briones, Manalang ii

TABLEOFCONTENTS
ABSTRACT I
INDEXOFFIGURESANDTABLES IV
ACKNOWLEDGEMENT V
1.INTRODUCTION 1
STOCKMARKETINDICES 1
PBILIPPINE ST0CK EXCBANuE INBEX (PSEI) 1
ALL SBARES INBEX 1
SECT0R INBICES 2
INBEX CALC0LATI0N 2
BASKETSELECTIONCRITERIA 2
SIGNIFICANCEANDOBJECTIVES 3
PRINCIPAL C0NP0NENT ANALYSIS AS SELECTI0N CRITERI0N S
0B}ECTIvES 4
SCOPEANDLIMITATIONS 5
2.STATISTICALMETHODS,FINANCIALMEASURESANDSPECIALIZEDINDICES 6
PRINCIPALCOMPONENTANALYSIS 6
INTR0B0CTI0N 6
BEFINITI0N 0F PRINCIPAL C0NP0NENTS (PCS) 6
BERIvATI0N 0F TBE PRINCIPAL C0NP0NENTS (PCS) 7
TBE SINu0LAR vAL0E BEC0NP0SITI0N (SvB) TBE0REN 8
INP0RTANCE 0F SvB T0 PCA 9
FINANCIALMEASURES 10
BETA C0EFFICIENT ([) 1u
BEBTEQ0ITY (BE) RATI0 1u
RET0RN 0N EQ0ITY (R0E) 1u
PRICEEARNINuS (PE) RATI0 11
S0STAINABLE uR0WTB RATE (u) 11
SPECIALIZEDINDICES 11
FTSE BEFENSIvE INBEX SERIES 11
R0SSELL uR0WTB ANB vAL0E INBICES 12
3.METHODOLOGY 13
INDEXMETHODOLOGY 13
FINANCIAL NEAS0RE CRITERIA 14
BACKTESTING 15
BATA TRANSF0RNATI0N 1S
FACT0R L0ABINuS 16
BASKET C0NP0SITI0N 17
INDEXLEVELCOMPUTATION 18

Awit, Briones, Manalang iii

4.RESULTSANDANALYSIS 19
INDEXBASKETS 19
NARKET INBEX 19
BEFENSIvE INBEX 21
EQ0ITY INBEX 22
uR0WTB INBEX 2S
BASKETCOMPOSITION 23
CLASSIFICATI0N PER SECT0R 2S
CLASSIFICATI0N PER NARKET CAPITALIZATI0N 24
INDEXPERFORMANCE 25
INBEX LEvEL 2S
L0u RET0RNS 28
INBEX BASKET v0LATILITY 29
FORECASTINGTHEBASKETCOMPOSITION 30
5.CONCLUSION 31
SUMMARY 31
RECOMMENDATIONS 32
REFERENCES 33
APPENDIXA:RCODEPCAFORLOGRETURNS A
APPENDIXB:RCODEPCAFORVOLUMETURNOVER C
APPENDIXC:RCODEBETAESTIMATION E
APPENDIXD:BASKETCOMPOSITION:SECTOR F
APPENDIXE:BASKETCOMPOSITION:MARKETCAPITALIZATION G

Awit, Briones, Manalang iv

INDEXOFFIGURESANDTABLES

Figuie 1 Inuex Peifoimance ..................................................................................................................................................................... 26
Figuie 2 Befensive Inuex Level ............................................................................................................................................................... 26
Figuie S Equity Inuex Level ...................................................................................................................................................................... 27
Figuie 4 uiowth Inuex Level .................................................................................................................................................................... 27
Table 1 Bate Range foi PCA ...................................................................................................................................................................... 16

Table 2 Piopoition of vaiiance of PC1 ................................................................................................................................................ 17
Table S PCA Ciiteiia Ranking ................................................................................................................................................................... 17
Table 4 Naiket Inuex ................................................................................................................................................................................... 17
Table S Befensive Inuex ............................................................................................................................................................................. 18
Table 6 Equity Inuex .................................................................................................................................................................................... 18
Table 7 uiowth Inuex .................................................................................................................................................................................. 18
Table 8 Inuex Levels .................................................................................................................................................................................... 18
Table 9 Naiket Inuex ................................................................................................................................................................................... 19
Table 1u Naiket Inuex vS PSEi ............................................................................................................................................................... 2u
Table 11 TEL Naiket Inuex Ranking .................................................................................................................................................... 2u
Table 12 Befensive Inuex .......................................................................................................................................................................... 21
Table 1S Equity Inuex ................................................................................................................................................................................. 22
Table 14 uiowth Inuex ............................................................................................................................................................................... 2S
Table 1S Aveiage Basket Composition Pei Sectoi ......................................................................................................................... 24
Table 16 Naiket Capitalization Classifications ................................................................................................................................ 24
Table 17 Aveiage Basket Compositions pei Naiket Capitalization ....................................................................................... 2S
Table 18 uiowth Rate .................................................................................................................................................................................. 27
Table 19 Key Statistics of the Log Retuins of the Inuices ........................................................................................................... 28
Table 2u Inuex Basket volatility Neasuie .......................................................................................................................................... 29
Table 21 Foiecasteu Baskets foi Naich 2u1S .................................................................................................................................. Su
Table 22 Basket Compositions ................................................................................................................................................................ Su
Table 2S Basket Biiveis ............................................................................................................................................................................. Su

Awit, Briones, Manalang v

ACKNOWLEDGEMENT

Without the help of ceitain inuiviuuals, the gioup woulu not have been able to conuuct anu finish this stuuy.
As such, the gioup woulu like to acknowleuge these people, as a token of theii appieciation foi theii help anu
assistance.

Without the guiuance of Ni. Antony R. Zosa, Bi. Emmanuel A. Cabial, anu Bi. Elviia P. ue LaiaTupiio, the
gioup woulu not have been able to finu the iight uiiection neeueu foi this stuuy.

Without the mentoiing of Ns. Nica Ella N. Cu anu Ni. Naik Fieueiick v. visua, the gioup woulu not have
iioneu out the uetails of the papei. Because of theii continuous effoits to check even the smallest uetails, the
gioup was able to auu moie value to the stuuy.

Without the peiseveiance of Ns. Regina ueoigia R. Ciisostomo, the gioup woulu not have hau the uata
neeueu to conuuct the stuuy. Without hei pioviuing all the uata the gioup askeu, this stuuy woulu not have
pusheu thiough.

Without the guiuance of Ni. Ramil T. Batallei, the gioup woulu not have been able to fully giasp anu
unueistanu the statistical methous employeu in this stuuy.

Because of the geneiosity of these people, the gioup was able to finish this stuuy. Because of theii guiuance,
the gioup was able to conuuct a stuuy that woulu hopefully contiibute moie to the unueistanuing of stock
maiket inuex methouology.

Awit, Briones, Manalang 1

1.INTRODUCTION
StockMarketIndices
Stock maiket inuices pioviue a moie efficient way of measuiing a paiticulai section of the associateu
stock maiket. While theie aie inuices specific to a paiticulai collection of stocks that satisfy some set
ciiteiia, theie aie also inuices that measuie the geneial movement of the maiket. These inuices aie calleu
bioaubaseu inuices. Foi the Philippine Stock Exchange, the sole bioaubaseu inuex useu is the Philippine
Stock Exchange Inuex (PSEi). Now ieaching bieakthiough levels beyonu the 6uuupoint maik, the PSEi
has been heialueu as the seconu best peifoiming inuex in Asia Pacific. Asiue fiom the main inuex, the
Stock Exchange has seveial othei inuices. Bepenuing on what the infoimation the investois neeu, the
Philippine Stock Exchange has eight inuices to offei.

PhilippineStockExchangeIndex(PSEi)
Being the main inuex of the Philippine Stock Exchange (PSE), the PSEi is composeu of a fixeu basket of Su
companies, whose selection is baseu on a specific set of ciiteiia. It measuies the ielative change in the
fieefloat
1
aujusteu maiket capitalization of the Su laigest anu most active common stocks listeu at the
PSE, baseu on the Exchanges basket selection ciiteiia. By gauging changes in the stock piices of selecteu
listeu companies, the PSEi pioviues a snapshot of the maikets oveiall conuition. The base level of the
PSEi was peggeu at 1,u22.u4S points. This was ieckoneu accoiuing to the close of the inuex on Febiuaiy
28, 199u, which is the PSEis base uate. The Exchange auopteu the name PSEi in Apiil 2uu6. In the past,
vaiious labels weie useu to iefei to the Exchanges main inuex, such as the Phisix anu the PSE Composite
Inuex.
2

AllSharesIndex
Asiue fiom the main inuex, the Stock Exchange has a bioauei inuex, the All Shaies Inuex, which incluues
in its basket all listeu common stocks of the Exchange, excluuing those in the Small anu Neuium
Enteipiise (SNE) Boaiu. Insteau of fiee floataujusteu maiket capitalization, this inuex measuies the
ielative change in full maiket capitalization. uiven these qualities of the inuex, All Shaies Inuex coveis
moie infoimation about the maiket. As such, investois who wish to know moie about the maiket, anu
not just the state of the blue chip companies, can look at this inuex.

1
Fiee float, also known as public float, iefeis to the poition of the outstanuing shaies that aie fieely available anu
tiauable in the maiket, oi those shaieholuings, which aie nonstiategic in natuie.
2
See The Philippine Stock Exchange, Inc. Reviseu Policy on Inuex Nanagement (Nemoianuum No. 2u11u181)


SectorIndices
0pon enlistment in the Exchange, each company is assigneu to one of the six sectois of the Exchange.
Each sectoi has an associateu inuex, which tiacks the sectois peifoimance. The six inuices aie the (1)
Financials Inuex; (2) Inuustiial Inuex; (S) Boluing Fiims Inuex; (4) Piopeity Inuex; (S) Seivices Inuex;
anu (6) Nining & 0il Inuex. uiven the natuie of these inuices, sectoi inuices covei moie specializeu
infoimation about its iespective sectoi. Bence, investois inteiesteu in a specific sectoi can look at its
sectoi inuex to know moie about its conuition.

IndexCalculation
Foi any tiauing uay, the inuex is computeu by ueiiving the change in the inuex components cuiient total
fiee floataujusteu maiket capitalization fiom the base total fiee floataujusteu maiket capitalization, anu
multiplying this change with the pievious uays closing inuex level. Nathematically, this is given by
Inuex
t
=
(P
t
t
)
n
=1
(P
,t-1
t
)
n
=1
Inuex
t-1

wheie n = numbei of constituents of the inuex, P
t
= last tiaueu piice of company i at uay t, anu
t
=
numbei of fiee float shaies of company i at uay t
S
. Bowevei, moie than the actual value of the inuex,
investois aie geneially moie inteiesteu on the ietuins of the inuex.

BasketSelectionCriteria
0nly companies with common stocks listeu in the main boaiu of the PSE foi at least six months uuiing the
ieview peiiou aie eligible foi inclusion in the PSEi. The cuiient ciiteiia foi listeu companies to be eligible
foi the PSEi, as stateu in PSEs ieviseu policy on inuex management, aie as follows:
1. FreeFloat. A companys fiee float shaies must be 12% of its outstanuing shaies at the enu of
the 12month peiiou in ieview.
2. Liquidity. The stocks of the company must iank among the top 2S% in teims of meuian uaily
tiauing value pei month
4
in nine out of the twelve month peiiou in ieview.
S. Full Market Capitalization. Companies that pass the fiee float anu liquiuity eligibility
iequiiement aie iankeu fiom highest to lowest accoiuing to theii full maiket capitalization,
insteau of float maiket capitalization. The ianking uoes not consiuei the sectoi iepiesentation
of companies, anu tieats eligible companies equally.

S
This can also be calculateu by multiplying the numbei of outstanuing shaies of company i at uay t with the fiee float
factoi of company i to be applieu to each secuiity, expiesseu as a numbei between u anu 1, wheie 1 iepiesents 1uu% fiee
float. Foi All Shaies Inuex, insteau of fiee float,
t
is equal to the full maiket capitalization.
4
This is computeu by ianking each uaily tiauing value in the iegulai boaiu of a companys stock anu selecting the miuule
value


The Su laigest companies baseu on full maiket capitalization aie to be incluueu in the PSEi basket. The
next five companies shall foim the ieseive list. 0n the othei hanu, the sectoi inuices have a fewei
selection ciiteiia
S
, anu has no limit on the numbei of membeis of basket of theii iespective inuices.

SignificanceandObjectives
uiven the cuiient inuices of the Exchange, as well as the infoimation they caiiy, theie is a neeu to have
othei inuices that will covei moie infoimation about the maiket. Alteinatively, given the cuiient basket
selection ciiteiia, theie may also be a neeu to auu moie ciiteiia in the selection piocess to have the inuex
covei moie infoimation. As such, in line with the PSEs goal of attiacting investoi inteiest, this stuuy
uelves into the cieation of possible inuices which may be of ielevance to vaiious investoi types.
Alongsiue this, mouifications to make the stock inuex methouology moie objective aie also intiouuceu.
This is impoitant as the cuiient selection ciiteiia aie iathei subjective since the numbeis useu in the
ciiteiia uo not have statistical basis.

PrincipalComponentAnalysisasSelectionCriterion
The motivation foi the utilization of the piincipal component analysis (PCA) in this stuuy is not foieign to
pievious methouologies uiiecteu towaius the uevelopment of "optimal" stock inuices. A stuuy conuucteu
by Feeney anu Bestei (1964), Stock Market Indices: A Principal Component Analysis, on the Bow }ones
Inuustiial Aveiage (B}I) contiasteu against thiee inuices constiucteu baseu on uata geneiateu by the
peifoimance of PCA uelveu into the efficacy of the saiu inuices in ueliveiing infoimation as ielevant to
investois. Woiking unuei the iationale that stock maiket inuices aie effective only insofai as they ielate
infoimation about the maiket (upon which investois compaie theii iespective poitfolios), PCA is capable
of captuiing the uesiieu infoimation by ieuucing the uimensionality of the movement of stock piices
anuoi stock piice ietuins while allowing foi the ietention of the vaiiability of the saiu elements.
Wheieas weighteu inuices geneially assume an a piioii set of weights foi stocks, in the utilization of PCA
at the aiiival of a maiketieflective inuex, weights aie peiceiveu as inteinallyueteimineu as they aie
uiiven by stock piice volatility, anu aie thus uynamic. PCA, theiefoie, allows foi an elimination of static,
aibitiaiy anu exteinallyuiiven assumptions that aie usually useu in the ciafting of maiket inuices.

Similaily, Amenc, Chan, uoltz, Naitellini (2u1u) piesenteu in theii papei EfficientEquityIndices:Towards
a New Paradigm an inuex methouology that is iiskefficient. Incoipoiating estimates of iisk in inuex
methouology is impoitant so an estimate of the covaiiance matiix is iequiieu. Bowevei, computing the
covaiiance matiix using past ietuin obseivations often leaus to estimation eiioi, iesulting in pooi outof
sample peifoimance. This is mainly attiibuteu to the laige numbei of paiameteis to estimate in the

S
Sectoi inuices only have two selection ciiteiia: liquiuity anu tiauability.


covaiiance matiix, anu the piesence of noise inheient in uata. This pioblem becomes seveie when
uealing with a laige numbei of assets, since most financial poitfolios consist of multiple assets anu theii
ietuins uepenu concuiiently on many economic anu financial vaiiables. Bence, it is impoitant to come up
with a mouel that will ieuuce the uimensionality of the estimation pioblem while getting iiu of the
noise in the piocess. In piactice, obseiveu ietuin seiies often exhibit similai chaiacteiistics which
might be uiiven by some common souices, often iefeiieu to as common factois. While factoi mouels can
be useu to uesciibe the ietuins thiough its exposuies to common iisk factois (e.g., macioeconomic
vaiiables), one alteinative is to avoiu taking a view on which factois mattei, anu to iely on statistical
factoi analysis to extiact factois fiom the uata. Piincipal component analysis is a statistical methou which
geneiates factois as lineai combinations of constituent stocks ietuins. Technically, these components
have the auvantage of summaiizing the maximum amount of infoimation containeu in the uata, with a
low numbei of uncoiielateu factois. Since the piincipal components aie lineai combinations, they can
also be inteipieteu as ietuins to poitfolios of constituent stocks. Typically, the fiist piincipal component
closely iesembles the aveiage ietuin of constituents since it is a ioughly equally weighteu lineai
combination of the stock ietuins. Bence, this component might iepiesent the geneial movement of the
stock maiket anu can be inteipieteu as a maiket component.

Objectives
Baseu on the finuings of Feeney anu Bestei (1964) anu Amenc, Chan, uoltz, Naitellini (2u1u), this papei
shall uiscuss using piincipal component analysis (PCA) as a basket selection ciiteiion in the Philippine
stock maiket setting. uiven the natuie of PCA, the iesults of the saiu analysis will leau to the iuentification
of maiket uiiveis. This cieates foi a moie stiingent anu objective ciiteiia, shifting out the aibitiaiiness of
the existing iules foi basket selection.

Foi the cieation of inuices containing specializeu infoimation, the papei looks into othei financial
measuies such as beta, anu uebt anu equity iatios, among otheis. The cieation of alteinative inuices
which measuie othei aieas of the maiket that aie cuiiently unaccounteu foi is ielevant not only in the
iealization of the goal of attiacting investois, but also in the cieation of a moie competitive maiket
ielative to othei stock exchanges which have long uevelopeu inuices that catei to uiffeient aieas of
inteiest. Aftei which, the new inuices woulu be evaluateu to ueteimine how well they woulu peifoim in
teims of theii giowth iate anu log ietuins. While the main objective of this papei is to cieate new inuices,
having inuices that woulu outpeifoim the cuiient set woulu be beneficial foi this stuuy, as these inuices
woulu be consiueieu bettei not only in teims of methouology employeu, but also in teims of ietuins.

With this objective, the iest of the papei will be uiviueu as follows: Section 2 uiscusses piincipal
component analysis, incluuing the ueiivation anu selection of the piincipal components, the uiffeient


financial measuies that woulu be useu as selection ciiteiia, anu the methouology of compaiable anu
ielevant specializeu inuices fiom othei exchanges; Section S uetails the basket selection methouology foi
the pioposeu inuices; Section 4 analyzes the methouology piesenteu in the pievious section, as well as
the peifoimance of theii associateu inuex levels; anu Section S summaiizes this papei, as well as pioviue
some iecommenuations foi impioving the pioposeu methouology.

ScopeandLimitations
uiven the objectives of this papei, seveial limitations have to be consiueieu. Fiist, this stuuy peifoims
piincipal component analysis on common stocks only. 0thei types of secuiities such as piefeiieu stocks,
waiiants, anu Philippine Beposit Receipts (PBRs) aie omitteu fiom the uata set, as these secuiities aie
not as liquiu as the common stocks. Seconu, this papei is focuseu on cieating new inuex methouologies
that aie baseu piimaiily on piincipal component analysis. As such, all othei ciiteiia of the cuiient basket
selection will not be useu foi the methouology unuei stuuy, unless otheiwise stateu. Fuitheimoie,
establishing the cieuibility of piincipal component analysis as basket selection ciiteiion will not be
uiscusseu in uetail. Thiiu, this papei shall be limiteu to intiouucing foui new inuices. 0thei possible
vaiiations, asiue fiom the foui, will not be uiscusseu. 0thei limitations incluue the constiaints biought
about by uata availability anu accessibility, such as the collection of histoiical betas anu stanuaiuizeu
iatios. Likewise, in cases of financial measuies not ieauily available, then these measuies woulu be
computeu using stanuaiu foimulas anu available maiket uata. Bence, some computeu measuies may be
uiffeient fiom those iepoiteu by financial institutions such as Bloombeig anu Reuteis. Lastly, since the
iecomposition uates anu the uate iange of the uata set subjecteu to the analysis uo not match, it is
assumeu that the iesults woulu holu on effective uates of the basket iecomposition. This assumption is
giounueu on the fact that stocks aie maitingales. As such, the expecteu value of a stock, conuitional on
infoimation known up to touay, is the piice of the stock touay.

As the maiket uata useu in this papei weie obtaineu uuiing a bull stock maiket, inteipietations anu
analysis shoulu be seen in light of the saiu maiket conuition. Since theie is no uata set that coulu
iepiesent a beai maiket conuition, compaiing the iesults uuiing a bull maiket with the iesults uuiing a
beai maiket is not possible; that is, it woulu not be possible to see the peifoimance of the pioposeu
inuices uuiing a beai stock maiket.


2.STATISTICALMETHODS,FINANCIALMEASURESAND
SPECIALIZEDINDICES
PrincipalComponentAnalysis
Introduction
The cential iuea of piincipal component analysis (PCA) is to ieuuce the uimensionality of a uata set
consisting of a laige numbei of inteiielateu vaiiables, while ietaining as much vaiiation piesent in the
uata set as possible. This is achieveu by tiansfoiming the cuiient vaiiables to a new set of vaiiables, the
piincipal components (PCs), which aie uncoiielateu, anu which aie oiueieu so that the fiist few ietain
most of the vaiiation piesent in all of the oiiginal vaiiables.

In mathematical teims, its basic aim is to uesciibe the vaiiation in a set of coiielateu ianuom vaiiables,
X
1
, X
2
, , X
p
, in teims of a new set of uncoiielateu vaiiables,
1
,
2
, ,
q
, wheie 1 q p, each of which
is a lineai combination of the X vaiiables. The new vaiiables aie ueiiveu in uecieasing oiuei of
impoitance. This means that
1
accounts foi as much as the vaiiation in the oiiginal uata amongst all
lineai combinations of X
1
, X
2
, , X
p
. Then
2
is chosen to account foi as much as the iemaining vaiiation,
subject to being uncoiielateu with
1
, anu so on. In this piocess, the new set of vaiiables calleu the
piincipal components,
1
,
2
, ,
q
, aie ueiiveu such that the following piopeities holu: vai(
1
)
vai(
2
) vai(
q
) anu
1
,
2
, ,
q
aie uncoiielateu.

DefinitionofPrincipalComponents(PCs)
Let X = (X
1
, X
2
, , X
p
)
be a p 1 vectoi of ianuom vaiiables. Assume that all seconu moments of Xexist.

Let 2 = cov(X). Assume foi simplicity that E(X) = u. The firstprincipalcomponent,
1
, is uefineu by
1
= u
1
X = o
1
X
p
=1

wheie u
1
= (o
11
, o
21
, , o
p1
)
, such that vai(

1
) = u
1
2u
1
is maximum.

The secondprincipalcomponent,
2
, is the ianuom vaiiable uefineu by
2
= u
2
X = o
2
X
p
=1

wheie u
2
= (o
12
, o
22
, , o
p2
)
, such that
1
anu
2
aie uncoiielateu anu vai(
2
) = u
2
2u
2
is maximum.


In geneial, the k
th
principalcomponent, is the ianuom vaiiable
k
such that
1.
k
= u
k
X = o
k
X
p
=1
wheie u
k
= (o
1k
, o
2k
, , o
pk
)

2.
1
,
2
, ,
k
aie uncoiielateu
S. vai(
k
) = u
k
2u
k
is maximum

DerivationofthePrincipalComponents(PCs)
First Principal Component. Consiuei the fiist piincipal component,
1
= u
1
X such that vai(

1
) =
u
1
2u
1
is maximum. Note that the maximum will not be achieveu foi finite u
1
so a noimalization
constiaint is neeueu. The constiaint that will be useu in the ueiivation is u
1
u
1
= 1, that is, the sum of
squaies of elements of u
1
equals 1. 0thei constiaints, such as max
]
|o
1]
| = 1, may be useu howevei it
leaus to a moie uifficult optimization pioblem, anu it will piouuce a set of ueiiveu vaiiables uiffeient
fiom the PCs.

To maximize vai(
1
) = u
1
i
2u
1
subject to the constiaint u
1
i
u
1
= 1, the usual appioach is to use the
technique of Lagiange multiplieis. Naximize
u
1
i
2u
1
-z(u
1
i
u
1
-1)
wheie z is a Lagiange multipliei. Biffeientiating with iespect to u
1
gives
22u
1
-2zu
1
=
2u
1
- zu
1
=
(2 - zI
p
)u
1
=
wheie I
p
is the p p iuentity matiix. Bence, z is an eigenvalue of 2 anu u
1
is the coiiesponuing
eigenvectoi. To ueciue which of the p eigenvectois gives u
1
i
X with maximum vaiiance, note that the
quantity to be maximizeu is
u
1
i
2u
1
= u
1
i
zu
1
= zu
1
i
u
1
= z
since u
1
i
u
1
= 1. So z must be as laige as possible. Thus, vai(
1
) = vai(u
1
i
X) = u
1
i
2u
1
= z
1
, wheie z
1
is
the laigest eigenvalue of 2, anu u
1
is its coiiesponuing eigenvectoi.

SecondPrincipalComponent. Now, consiuei the seconu piincipal component uefineu by
2
= u
2
i
X such
that vai(
2
) = u
2
i
2u
2
is maximum, anu
1
= u
1
i
X anu
2
= u
2
i
X aie uncoiielateu which is equivalent to
cov(
1
,
2
) = cov(u
1
i
X , u
2
i
X) = u. Note that
cov(u
1
i
X , u
2
i
X) = u
1
i
2u
2

= u
2
i
2u
1

= u
2
i
z
1
u
1

= z
1
u
2
i
u
1
= z
1
u
1
i
u
2


If z
1
is the laigest eigenvalue anu u
1
is its associateu eigenvectoi, then u
2
i
u
1
= u
1
i
u
2
= u. To specify zeio
coiielation between
1
anu
2
, any of the following equations coulu be useu:
u
1
i
2u
2
= u
u
2
i
2u
1
= u
u
2
i
u
1
= u
u
1
i
u
2
= u

0sing u
2
i
u
1
= u as constiaint foi zeio coiielation anu u
2
i
u
2
= 1 as noimalization constiaint, the quantity
to be maximizeu is
u
2
i
2u
2
- z(u
2
i
u
2
- 1) - u
2
i
u
1
wheie z anu aie Lagiange multiplieis. Biffeientiating with iespect to u

2
gives
22u
2
-2zu
2
- u
1
=
2u
2
-zu
2
-
2
u
1
=
anu multiplying this equation by u
1
i
gives
u
1
i
2u
2
- zu
1
i
u
2
-

2
u
1
i
u
1
=
Since u
1
i
2u
2
= u
1
i
u
2
= u anu u
1
i
u
1
= 1, the equation gives = u. Theiefoie,
2u
2
- zu
2
=
(2 -zI
p
)u
2
=

So z is an eigenvalue of 2 anu u
2
is the coiiesponuing eigenvectoi. Again, u
2
i
2u
2
= z, so z is to be as
laige as possible. Note that the eigenvalues of 2 aie unique. If not, z = z
1
implying that u
2
= u
1
, which
violates the constiaint u
1
i
u
2
= u. Bence, vai(
2
) = vai(u
2
i
X) = u
2
i
2u
2
= z
2
, wheie z
2
is the seconu
laigest eigenvalue of 2, anu u
2
is its coiiesponuing eigenvectoi of 2.
k
th
Principal Component. In geneial, the k
th
piincipal component of X is
k
= u
k
i
X anu vai(
k
) =
vai(u
k
i
X) = u
k
i
2u
k
= z
k
, wheie z
k
is the k
th
laigest eigenvalue of 2, anu u
k
is the coiiesponuing
eigenvectoi.

TheSingularValueDecomposition(SVD)Theorem
Theorem. Let X be an n p matiix measuieu about theii means (i.e., E(X) = u). The Singulai value
Becomposition theoiem states that X can be wiitten as
X = FLA
wheie
F is an n r matiix anu A is an p r matiix such that F
i
F = I
r
anu A
i
A = I
r


L is an r r uiagonal matiix
r is the iank of X

ImportanceofSVDtoPCA
The impoitance of the SvB is twofolu. Fiist, it pioviues a computationally efficient methou of finuing the
PCs. It is cleai that if theie exist F, L, anu A satisfying X = FLA, then A anu L will give the eigenvectois
anu the squaie ioots of the eigenvalues of X
i
X, anu hence the coefficients anu stanuaiu ueviations of the
piincipal components foi the sample covaiiance matiix S. In auuition, it also yielus F, the stanuaiuizeu
veision of PC scoies. To show this, multiply X = FLA on the iight by A to get XA = FLA
i
A = FL, since
A
i
A = I
r
. But XA is an n r matiix whose k
th
column consists of the PC scoies foi the k
th
PC. The PC
scoies z
k
aie theiefoie given by
z
k
= u
k
l
k
1
2
,

foi i = 1,2, , n, k = 1,2, , r. In matiix foim, Z = UL, oi U = ZL
-1
. The vaiiance of the scoies foi the k
th

PC is
I
k
(n-1)
, k = 1,2, , p. Note that l
k
heie uenotes the k
th
eigenvalue of X
i
X, so the k
th
eigenvalue of S is
I
k
(n-1)
. Theiefoie, the scoies given by F aie simply those given by Z, but scaleu to have vaiiance
1
(n-1)
.
Seconu, it pioviues auuitional insight into what a PCA actually uoes, anu it gives useful means, both
giaphical anu algebiaic, of iepiesenting the iesults of a PCA. Note that each element of X can be
expiesseu as
X
]
= :
k
l
k
1
2
,
o
]k
k=1

wheie :
k
, o
]k
aie the (i, k)
th
, (], k)
th
elements of F, A, iespectively, anu l
k
1
2
,
is the k
th
uiagonal element of
L. Thus X
]
can be split into paits
:
k
l
k
1
2
,
o
]k

foi k = 1,2, , r, coiiesponuing to each of the fiist r PCs. If only the fiist m PCs aie ietaineu, then

X
]
(m)
= :
k
l
k
1
2
,
o
]k
m
k=1

pioviues an appioximation to X
]
. In fact, X
]
(m)
gives the best possible iank m appioximation to X
]
, in the
sense of minimizing
(X
]
(m)
- X
]
)
2
p
]=1
n
=1

wheie X
]
(m)
is any iank m appioximation to X
]
.


FinancialMeasures
BetaCoefficient()
Beta coefficient is a metiic that shows the extent to which a given stocks ietuins move up anu uown with
the stock maiket. In othei woius, beta measuies a stocks volatility the uegiee to which its piice
fluctuates in ielation to the oveiall maiket. It gives a sense of the stocks maiket iisk compaieu to the
gieatei maiket. This measuie is calculateu using iegiession analysis.

Bepenuing on the value of beta, the following inteipietations can be maue:
1. Negative beta. Companies having beta less than u, which is possible but highly unlikely,
inuicate an inveise ielation to the maiket.
2. Beta of 0. Regaiuless of which way the maiket moves, companies with beta of u iemain
unaffecteu.
S. Beta between 0 and 1. Companies with volatilities lowei than the maiket have a beta
between u anu 1.
4. Betaof1. A beta of 1 iepiesents the volatility of the given inuex useu to iepiesent the oveiall
maiket, against which othei stocks anu theii betas aie measuieu. If a stock has a beta of one, it
will move the same amount anu uiiection as the inuex.
S. Betagreaterthan1. Stocks that have a beta gieatei than 1 have gieatei piice volatility than
the oveiall maiket, anu aie moie iisky.

DebtEquity(D/E)Ratio
BE iatio =
Total uebt
Common equity

Bebttoequity iatio is a measuie of a companys financial leveiage calculateu by uiviuing its total uebt by
common equity. It inuicates what piopoition of uebt anu equity the company is using to finance its assets.
A high BE iatio geneially means that a company has been aggiessive in financing its giowth with uebt.
This can leau to volatile eainings uue to auuitional inteiest expense.

ReturnonEquity(ROE)
R0E =
Net income
Common equity

Retuin on equity measuies a fiims piofitability by calculating how much piofit a company geneiates
with the money shaieholueis have investeu. A high ietuin on equity often ieflects the fiims acceptance
of stiong investment oppoitunities anu effective expense management. Bowevei, if the fiim has chosen
to employ a level of uebt that is high by inuustiy stanuaius, a high R0E might simply be the iesult of
assuming excessive financial iisk.


PriceEarnings(P/E)Ratio
P E iatio =
Piice pei shaie
Eainings pei shaie
=
Piice pei shaie
Net income
Common shaies outstanuing

The piiceeainings iatio shows how much investois aie willing to pay pei peso of iepoiteu piofits. This
iatio can also be seen as a ieflection of the maikets optimism conceining a fiims giowth piospects.
ueneially, a high PE means that investois aie anticipating highei eainings giowth in the futuie
compaieu to companies with a lowei PE.

SustainableGrowthRate(g)
g = R0E (1 -Biviuenu payout iatio)
Sustainable giowth iate is the maximum giowth iate that a fiim can sustain without having to inciease
financial leveiage. It is the most iealistic estimate of the giowth iate of a companys eainings, assuming
that the company uoes not altei its capital stiuctuie.

SpecializedIndices
FTSEDefensiveIndexSeries
The FTSE Befensive Inuex Seiies is uesigneu to be ielatively insensitive to the economic cycle. Its
methouology makes use of the Inuustiy Classification Benchmaik (ICB) subsectois, which classifies the
subsectois as Befensive, Cyclical oi Neutial, baseu on an intuitive economic iationale. Befensive Inuex
calculateu ovei the fiist yeai (baseu on the classification at the beginning of the fiist yeai) aie iefeiieu to
as the 'Ideal' inuex. At subsequent annual ieviews, the subsectoi classification is ievieweu anu the sub
sectois compiising each 'Ideal' inuex aie upuateu. A subsectoi pieviously classifieu as eithei Cyclical oi
Neutial that has a coiielation with the 'Ideal' Befensive Inuex that is gieatei than u.S, anu a maiket beta
lowei than u.S, anu a volatility less than 9u% of the volatility of the 'Ideal' Befensive Inuex, will be
ieclassifieu as Befensive at the annual ieview. 0n the othei hanu, if a subsectoi that is classifieu as
Befensive has a beta above 1, a negative coiielation with the 'Ideal' Befensive Inuex, anu volatility gieatei
than 11u% of the volatility of the 'Ideal' Befensive Inuex, it is iemoveu fiom the Befensive Inuex. If less
than 1u subsectois aie iepiesenteu in the Befensive inuex, each neutial subsectoi is iankeu by beta anu
volatility in uescenuing oiuei, anu coiielation with the 'Iueal' Befensive inuex in ascenuing oiuei. The
composite iank of each neutial subsectoi is uefineu as the sum of the thiee iankings. Subsectois with
the highest composite iank aie auueu to the Befensive inuex such that a minimum of 1u subsectois aie
always piesent in the Befensive inuex.


RussellGrowthandValueIndices
The Russell uiowth Inuex is constiucteu to pioviue a compiehensive, unbiaseu, anu stable baiometei of
the maiket. It is completely ieconstituteu annually to ensuie new anu giowing equities aie incluueu anu
that the iepiesenteu companies continue to ieflect giowth chaiacteiistics.

Last 2u11 ieconstitution, Russell staiteu using thiee vaiiables in the ueteimination of giowth anu value.
0n the value siue, aujusteu booktopiice (BP) iatio is useu, while on the giowth siue, the Institutional
Biokeis' Estimate System (IBES) foiecast meuiumteim giowth (2 yeais) anu sales pei shaie
histoiical giowth (S yeais) aie utilizeu. Foi each base inuex, stocks aie iankeu by the afoiementioneu
financial measuies. These iankings aie conveiteu to stanuaiuizeu units, wheie the value vaiiable
iepiesents Su% of the scoie anu the two giowth vaiiables iepiesent the iemaining Su%. These aie then
combineu to piouuce a composite value scoie (CvS). Stocks aie then iankeu by theii CvS, anu a non
lineai piobability algoiithm is applieu to the CvS uistiibution to assign giowth anu value weights to each
stock. In geneial, a stock with a lowei CvS is consiueieu giowth, a stock with a highei CvS is consiueieu
value anu a stock with a CvS in the miuule iange is consiueieu to have both giowth anu value
chaiacteiistics, anu is weighteu piopoitionately in the giowth anu value inuex. Stocks aie always fully
iepiesenteu by the combination of theii giowth anu value weights. Foi instance, a stock that is given a
2u% weight in a Russell value inuex will have an 8u% weight in the coiiesponuing Russell giowth inuex.


3.METHODOLOGY
In using the piincipal component analysis (PCA) as basis foi basket selection ciiteiion, a new inuex
methouology will be piesenteu fiist. Aftei which, the pioposeu methouology shall unueigo back testing.
0sing histoiical uata, the pioposeu methouology will be implementeu, anu the iesulting basket of each
inuex will be compaieu to the actual basket foi the given peiiou of a compaiable inuex. Lastly, the inuex
level of the iesulting basket foi each of the new inuices foimeu shall be computeu, compaieu when
possible, anu analyzeu.
IndexMethodology
In using the piincipal component analysis (PCA), the pioposeu inuex methouology will have thiee phases.
The fiist phase involves caiiying out two piincipal component analyses: a piincipal component analysis
on the ietuins of all listeu stocks in the Exchange, anu a piincipal component analysis on the volume
tuinovei of all stocks. This shall seive as the fiist two ciiteiia foi the basket selection. To captuie as much
maiket infoimation as available, all tiaueu stocks uuiing iecomposition peiiou shall be incluueu in the
analysis, incluuing those that weie uelisteu oi enlisteu in the miuule of the consiueieu peiiou.
6
An inuex
baseu only on the iesult of the fiist phase will be cieateu, anu this will be calleu Market Index as this
inuex is maiket uiiven.

Aftei which, auuitional ciiteiia that will uefine the inuex will be consiueieu in the seconu phase.
Bepenuing on the uesiieu natuie of the inuex, uiffeient ciiteiia may be auueu in this phase. Foi this
stuuy, thiee new inuices will be pioposeu. To quantify the chaiacteiistics of these thiee pioposeu inuices,
financial measuies will be useu as ciiteiia.
1. DefensiveIndex: An inuex measuiing the peifoimance of uefensive stocks. This inuex pioviues
an oveiview of how stocks that pioviue stable eainings iegaiuless of the state of the oveiall
stock maiket peifoim.
2. EquityIndex: An inuex measuiing the peifoimance of companies that have equityheavy capital
stiuctuie, anu which pioviue high ietuins foi its shaieholueis.
S. Growth Index. An inuex measuiing the peifoimance of companies with high potential giowth,
as measuieu by theii sustainable giowth iate.

Lastly, the thiiu phase involves assigning a iank to each stock baseu on all the ciiteiia consiueieu. Each
stock will be iankeu pei ciiteiion, with 1 being assigneu to the stock that best meets the ciiteiion. Aftei

6
In case of uelistment, the stock piice shall be zeio aftei uelistment. In case of enlistment, the stock piice shall be zeio
piioi to enlistment.


which, a stocks iank in the basket will be baseu on aiithmetic sum of its ianks. The top Su stocks woulu
make up the basket. Some aujustments will be maue when making up the basket:
1. Stocks uelisteu in the miuule of the iecomposition peiiou will not be incluueu in the basket.
2. If a stock has an A anu B, anu one of them enteieu the basket, then the othei shall entei as
well. Bowevei, they will be counteu as one, even though they aie tieateu inuiviuually.
S. In cases of tieu stocks, theii peifoimance in the seconu phase shall be useu to bieak ties. That is,
foi each tieu stocks, theii iespective iank pei ciiteiia in the seconu phase aie totaleu. The
stocks with the lowest sums enteis the basket.

FinancialMeasureCriteria
Defensive Index. Foi an inuex to be uefensive, its basket shoulu have uefensive stocks. Recall that the
key chaiacteiistics to iuentify uefensive stocks aie typically low piiceeainings (PE) iatios anu beta
values less than 1.u. Thus, the thiiu anu fouith ciiteiion foi this inuex shall be the betas anu PE iatios of
the stocks, wheie lowei beta anu lowei PE iatio aie moie uesiiable. Bowevei, negative PE iatios,
inuicative of negative net income anu thus unattiactive, aie possible. Similaily, stocks moving against the
maiket, as inuicateu by negative betas woulu not pioviue stable eainings. Bence, stocks with negative
PE iatios anuoi negative beta stocks woulu not be consiueieu in the thiiu phase.

EquityIndex. Recall that a company that has a low uebtequity (BE) iatio has a capital stiuctuie that is
geneially equityoiienteu. If the thiiu ciiteiion woulu be low BE iatio, then the iesulting inuex woulu be
the uesiieu Equity Inuex. To ensuie that having an equityheavy capital stiuctuie is to the auvantage of
the investois, a fouith ciiteiion, ietuin on equity (R0E), is auueu. 0n the othei hanu, it is impoitant to
also consiuei some uebtheavy companies which may have incuiieu uebt to iueally inciease theii net
income in the neai futuie thiough expansion, anu as a consequence, inciease the ietuins of theii
shaieholueis. Compaieu with othei companies with highei BE iatio but have no plans of expansion,
these companies aie moie attiactive foi investois. Auuing the R0E ciiteiion woulu make these
companies seeking expansion thiough uebt bettei off in the ianking. Thus, lowei BE iatio anu highei
R0E aie the uesiiable ciiteiia foi this inuex.

In using these financial measuies, note that a negative BE iatio inuicates a negative equity
7
. As such,
stocks with this iatio will be uisiegaiueu in the thiiu phase since the goal of this inuex is to ueteimine the
peifoimance of stocks with equityheavy capital stiuctuie. 0n the othei hanu, having a negative R0E is
allowable since this inuex wishes to maximize R0E, hence having a negative iatio woulu just put the stock
below the list.

7
Assets aie less than uebt. Bence, equity shoulu be negative to maintain the Asset = Bebt + Equity ielationship.


Growth Index. Companies with high potential giowth aie those that have high sustainable giowth iate.
As such, this inuex has highei giowth iate as its sole ciiteiion. Bowevei, it is possible to have a positive
giowth iate uespite having negative R0E
8
. As such, stocks with negative R0E anu negative ietention iatio
woulu not be consiueieu, to uisiegaiu companies that uo not actually have potential giowth.

BackTesting
To test the effectiveness of the new methouology, histoiical uata fiom 2uu8 onwaius shall be useu when
implementing the pioposeu methouology. The basket shall be iecomposeu using the saiu methouology
on the following pievious iecomposition uates: Nay 4, 2uu9, Novembei S, 2uu9, Nay 11, 2u1u, Novembei
8, 2u1u, Nay 9, 2u11, Septembei 12, 2u11, Naich 12, 2u12, anu Septembei 1u, 2u12, foi a total of eight
basket iecompositions.

DataTransformation
In peifoiming piincipal component analysis, uaily uata on the piice anu the volume tuinovei of each
listeu stock in the Exchange fiom }anuaiy 2, 2uu8 to Becembei 28, 2u12 will be useu, with seveial
tiansfoimations applieu on the uata.

Log Return. Foi the analysis on ietuins, each stock ietuin is obtaineu by applying a loguiffeience
tiansfoimation on the uaily closing piices of each stock. The ietuin on stock i is uefineu as
r
t
= lnp
t
-lnp
,t-1

wheie p
t
is the closing piice of stock i on tiauing uay t, anu p
,t-1
is the closing piice of the saiu stock on
the pievious tiauing uay.

Loguiffeience tiansfoimation is uone to iemove any uepenuence on the actual value of the stock, since
applying the analysis uiiectly on the stock piice will be biaseu towaius stocks that have highei piices.
Stocks with highei piices tenu to have highei absolute ietuins compaieu to stocks with lowei piice, even
though theii ielative ietuins maybe otheiwise.

Also, aujusteu stock piices weie useu so that stock ietuins aie maiket uiiven. Boing so effectively
iemoves changes causeu by management uecisions, such as issuance of stock uiviuenus to stockholueis,
change in pai value, quasiieoiganization, stock iights offeiing, etc.

8
If the ietention iatio weie less than zeio, then given a negative R0E, the estimateu giowth iate woulu be positive.


Volume Turnover. Foi the analysis on volume tuinovei, each volume tuinovei shall be expiesseu as
peicentage of its outstanuing shaies pei uay. The volume tuinovei on stock i is given by
:
t
=
I
t
0S
t

wheie I
t
is the actual tiaueu volume of stock i on tiauing uay t, anu 0S
t
is its outstanuing shaies on the
same tiauing uay. Similai to ietuins, this is uone to iemove any bias towaius stocks that have high
outstanuing shaies to begin with.
MeanCorrected. Befoie peifoiming the analysis, each uata set must fiist be uemeaneu, i.e., obseivations
must be measuieu about theii means. This is impoitant since the piincipal component analysis will be
utilizing the SingularValueDecompositionTheorem, which assumes that given a uata matiix X, E(X) = .

FactorLoadings
In peifoiming the piincipal component analysis, the SingularValueDecompositionTheorem shall be useu
to ueiive the factoi loauings. Noieovei, in applying the theoiem, the uata will not be stanuaiuizeu, i.e.,
uiviue by theii iespective stanuaiu ueviations. Stanuaiuizing the uata will not be necessaiy as all
obseivations aie expiesseu in the same units.

Piincipal component analysis is peifoimeu on a specific iange of obseivations baseu on the
iecomposition uate consiueieu (see Table 1). Since the inuex methouology is only inteiesteu in the fiist
factoi loauing (oi PC1), only the piopoition of vaiiance of the fiist piincipal component, oi the amount of
infoimation that can be explaineu by the PC1, will be taken into consiueiation (see Table 2).

Table1DateRangeforPCA
RecompositionDate DateRange
Nay 4, 2uu9 }an. 1, 2uu8 Bec 24, 2uu8
Nov. S, 2uu9 }uly 1, 2uu8 }une Su, 2uu9
Nay 11, 2u1u }an. S, 2uu9 Bec 29, 2uu9
Nov. 8, 2u1u }uly 1, 2uu9 }une 29, 2u1u
Nay 9, 2u11 }an. 4, 2u1u Bec Su, 2u1u
Sept. 12, 2u11 }uly 1, 2u1u }une Su, 2u11
Naich 12, 2u12 }an. S, 2u11 Bec 29, 2u11
Sept. 1u, 2u12 }uly 1, 2u11 }une 29, 2u12


Table2ProportionofVarianceofPC1
RecompositionDate Returns VolumeTurnover
Nay 4, 2uu9 S7.1962% 24.4861%
Nov. S, 2uu9 4u.u78S% S8.S2SS%
Nay 11, 2u1u S7.1S9u% S2.6911%
Nov. 8, 2u1u S2.199S% Su.7uu6%
Nay 9, 2u11 29.4224% S6.6S94%
Sept. 12, 2u11 81.98S7% S9.4SSu%
Naich 12, 2u12 7S.S162% 4u.S616%
Sept. 1u, 2u12 2S.u6S2% S1.9962%
BasketComposition
Aftei peifoiming the piincipal component analysis, each stock is iankeu baseu on the absolute value of
its factoi loauing: the highei the absolute factoi loauing of a stock, the highei its iank. A sample ianking
baseu on the fiist two ciiteiia foi the Nay 2u11 iecomposition foi the fiist ten stocks is given as an
example (see Table S).

Table3PCACriteriaRanking
Stock Returns VolumeTurnover
AbsolutePC1 Rank AbsolutePC1 Rank
2GO u.uuuu98 1Su u.uuuuS7 127
AAA u.uuu12u 14S u.uuuuuu 22u
AB u.uu8111 1S u.uuuuu6 171
ABA u.uuuu28 19S u.uu1176 S4
ABB u.uu9S29 11 u.uuuuuu 212
ABG u.uuuuuu 2S7 u.uuuuuu 2S9
ABS u.uuu869 67 u.uuuuS4 1Su
AC u.uS7474 6 u.uuuuS6 128

The iank of the stock foi the seconu phase uepenus on the natuie of the inuex, as uesciibeu eailiei. A
sample basket ianking foi the fiist five stocks foi Naich 2u12 iecomposition foi each of the foui inuices
is also given below as example (see Tables 4 to 7).

Table4MarketIndex
Stock Returns VolumeTurnover BasketRank
AbsolutePC1 Rank AbsolutePC1 Rank Total Rank
2GO u.uuuu29 87 u.uuuuuS 172 2S9 1Su
AAA u.uuuu47 69 u.uuuu8u 94 16S 41
AB u.uuuuSS 64 u.uuuuu1 211 27S 166
ABA u.uuuuu1 2u7 u.uuu419 48 2SS 146
ABG u.uuu246 26 u.uuuu7S 97 12S 19


Table5DefensiveIndex
Stock Returns VolumeTurnover Beta Earnings BasketRank
AbsolutePC1 Rank AbsolutePC1 Rank Beta Rank P/ERatio Rank Total Rank
2GO u.uuuu29 87 u.uuuuuS 172 - - - - - -
AAA u.uuuu47 69 u.uuuu8u 94 u.uuu7S4 8u - - - -
AB u.uuuuSS 64 u.uuuuu1 211 - - 9,14S.68 182 - -
ABA u.uuuuu1 2u7 u.uuu419 48 u.uuuuu7 24 S.944689 12 291 14
ABG u.uuu246 26 u.uuuu7S 97 u.uS1S82 1Su - - - -

Table6EquityIndex
Stock Returns VolumeTurnover CapitalStructure ROE BasketRank
AbsolutePC1 Rank AbsolutePC1 Rank D/ERatio Rank ROE Rank Total Rank
2GO u.uuuu29 87 u.uuuuuS 172 2.6844S1 21u -19.2918S7 222 691 222
AAA u.uuuu47 69 u.uuuu8u 94 - - NSE - - -
AB u.uuuuSS 64 u.uuuuu1 211 u.uuSu14 S u.6S9S8S 171 4S1 1u4
ABA u.uuuuu1 2u7 u.uuu419 48 u.2uSS6u 6S 1S.79S2S8 SS S7S 4S
ABG u.uuu246 26 u.uuuu7S 97 u.u4S1SS 2S -11.S29SSS 217 S6S S9

Table7GrowthIndex
Stock Returns VolumeTurnover Growth BasketRank
AbsolutePC1 Rank AbsolutePC1 Rank GrowthRate Rank Total Rank
2GO u.uuuu29 87 u.uuuuuS 172 -19.2918S7 222 148 2u1
AAA u.uuuu47 69 u.uuuu8u 94 - - - -
AB u.uuuuSS 64 u.uuuuu1 211 u.6S9S8S 1S8 4S4 171
ABA u.uuuuu1 2u7 u.uuu419 48 1S.79S2S8 SS 29u 69
ABG u.uuu246 26 u.uuuu7S 97 -11.S29SSS 216 SS9 1uu

Aftei the basket ianking, pieviously uesciibeu aujustments will be maue. Aftei which, the basket is
composeu on the basis of its basket ianking anu the aujustments maue.

IndexLevelComputation
Aftei composing the basket foi each iecomposition uate, the inuex level is computeu foi each inuex, using
the same computation as that of the Exchange inuex (PSEi). The base inuex value woulu be the Exchange
inuex value on Apiil Su, 2uu8 foi the Naiket Inuex, anu 1,uuu foi the thiee new inuices (see Table 8 foi
yeaienu inuex levels). Each basket is effective fiom the uate of announcement, until the next
announcement uate.

Table8IndexLevels
Year PSEi MarketIndex DefensiveIndex EquityIndex GrowthIndex
2uu9 S,uS2.68 S,81S.68 2,179.74 2,2Su.97 1S,uS9.2S
2u1u 4,2u1.14 S,S82.42 4,119.S6 2,7S7.2S 18,S9u.78
2u11 4,S71.96 S,4uu.16 4,162.21 2,86u.S7 18,74S.64
2u12 S,812.7S 7,911.68 S,9S8.4S S,8S4.u8 27,911.7S


4.RESULTSANDANALYSIS
IndexBaskets
MarketIndex
Baseu on the pioposeu inuex methouology, the following aie the membeis of the basket foi each
iecomposition uate foi the pioposeu Naiket Inuex.

Table9MarketIndex
May2009 Nov2009 May2010 Nov2010 May2011 Sep2011 Mar2012 Sep2012
1 AC AuI AEv AEv AEv AEv ABu AuI
2 AuI ALI AuI AuI AuI AuI AEv AP
S ALI AP ALI ALI AP ALI AuI AT
4 AT AT AP AP AT AP ALI BB0
S BC0R BC0R AT AT BB0 BB0 AP BL00N
6 BPI BB0 BB0 BB0 BPI BEL BEL BPI
7 BRN BPI BPI BPI CEB BPI CEB CAL
8 BNC BNC CPN CPN BNC CEB CNT CBI
9 EBC EBC EBC BNC EBC CNT CYBR C0L
1u uE0 FuEN FuEN EBC FuEN BNC BFNN BIZ
11 ICT FPB ICT FuEN FPB uERI BNC BNC
12 ISN ICT ISN FLI ICT BLCN uERI ICT
1S }FC }uS }FC ICT ISN ICT ICT }uS
14 LPZ LPZ LIB ISN }uS ISN LIBC LNu
1S NARC NARC NBT }FC LPZ LIBC LR NBT
16 NBT NBT NEu LIB NARC LR NARC NIC
17 NEu NEu NER LPZ NBT NARC NBT NWC
18 NER NER NIC NARC NEu NBT NER NI
19 NWC 0N NPI NBT NPI NER NIC 0N
2u 0N PAX NWC NEu NI NPI NPI PC0R
21 PC0R PCEv NI NER 0RE 0RE NI PNB
22 PX PNB PAX NPI PNB PC0R 0RE PXP
2S RLC PX PCEv PAX PX PNB PC0R RCB
24 SN RLC PNB PX RLC PX PNB RLC
2S SNB SCC PX RLC SCC RLC RCB SECB
26 SNCB SN RLC SECB SECB SECB RLC SN
27 SNPB SNPB SECB SN SN SNB SN SNBC
28 0RC 0BP SPB SNPB SNPB SNC SNC SNPB
29 vLL vLL 0RC 0RC 0RC SNPB SNBC 0BP
Su WEB WEB WEB WEB WEB 0RC SNPB 0RC


Compatibility with Historical Basket. Compatibility of the Naiket Inuex with the histoiical basket of
PSEi was also evaluateu, i.e., how many membeis of the Naiket Inuex basket weie actually in the PSEi
basket uuiing the given iecomposition uate (see Table 1u).
Table10MarketIndexVSPSEi
RecompositionDate Match
Nay 2uu9 6u%
Nov 2uu9 S7%
Nay 2u1u 6u%
Nov 2u1u 7u%
Nay 2u11 67%
Sept 2u11 6u%
Nai 2u12 SS%
Sept 2u12 Su%

Bespite having a high compatibility with the histoiical basket of PSEi, TEL, the most populai Philippine
stock anu the laigest in the Exchanges iostei, uiu not appeai in any of the Naiket Inuex baskets. Baseu
fiom its factoi loauings, TEL consistently hau one of the highest PC foi the fiist analysis. Bowevei, it also
hau one of the lowest factoi loauings in the seconu PCA. As such, even though TEL was a maiket movei in
teims of log ietuins, it was not consiueieu as such in teims of volume tuinovei. This coulu be explaineu
by the fact that TEL is one of the most expensive stock in the maiket. Bence, some investois woulu iathei
holu on to it, iathei than tiaue it actively on a uaily basis. This attituue woulu then cause the stock to have
a low factoi loauing in the volume tuinovei ciiteiion.

Table11TELMarketIndexRanking
RecompositionDate Returns VolumeTurnover Final
Nay 2uu9 1 14S 4S
Nov 2uu9 1 1S7 SS
Nay 2u1u 1 1S8 S9
Nov 2u1u 2 166 S4
Nay 2u11 1 196 72
Sept 2u11 S 164 S1
Nai 2u12 2 179 SS
Sept 2u12 2 174 Su


DefensiveIndex
iecomposition uate foi the pioposeu Befensive Inuex.

Table12DefensiveIndex
1 ABA ABA ABA AEv AEv AuI ABA AuI
2 AEv AEv AEv AuI AuI AP AEv AP
S AuI AuI AuI AP ALBI AP0 ANI AT
4 AP AP AP BB0 AP
BC
BCB
AP
BC
BCB
S AP0 BBI AP0 BPI BB0 BSC AP0 BSC
6 BKB BRN BBI CNT CEB CNT BSC EEI
7 BRN CNT CNT C0AT BuTL CPu BNC EW
8 CNT C0AT BNC BuTL EBC EEI EEI FuEN
9 C0AT BNC EBC BNC EEI FLI ELI
F}P
F}PB
1u BNC EEI EEI EBC FuEN IP FBC FLI
11 EvER EvER EvER EEI FLI KPN FLI IP0
12 FLI FLI FLI FBC FPB LFN IRC IRC
1S F00B LPZ F00B FuEN uNA7 L0T0 ISN }uS
14 uNA7 NEu }uS FLI BI
NA
NAB
LPZ LPZ
1S KPN 0N LPZ F00B }uS NAKE NAKE NARC
16 LPZ PCEv NEu FPB L0T0 NEu NARC NBT
17 LR
PEC
PECB
NPI BI LPZ
0PN
0PNB
NPI NEu
18 NEu PBA NWC LPZ NAKE 0RE NIKL NWC
19 NWC PIP 0N NEu NEu 0v
0PN
0PNB
0RE
2u
0PN
0PNB
PNB PAX NWC NBC PC0R 0RE PAX
21 PCEv PNX PCEv PNB NWC RFN 0v PBA
22 PBA RFN PNB P0PI 0N RLC PC0R PNB
2S PIP RLC P0PI RCB 0v SECB PBA RCB
24 PX SNB RLC RLC PX SuI RCB RLC
2S RLC SNCB SuI SECB RCB SBNu RLC R0X
26
SNC
SNCB
SNBC SNB SuI RLC SNC SuI SECB
27 SNPB SNPB SPB SNPB SECB SNPB SBNu SuI
28 vLL 0BP TA 0RC 0BP 0BP SNBC S0C
29 WEB vLL 0RC v 0RC v SNPB TA
Su WPI WEB vLL WEB v v0L v 0BP


EquityIndex
iecomposition uate foi the pioposeu Equity Inuex.

Table13EquityIndex
1 ABA ABA ABA AEv AEv AEv AEv AP
2 AuI AuI AEv AuI AuI AP AP AT
S ALI ALI AuI ALI ANS BC0R BC0R BC0R
4 AP AP BC0R AP AP BNN BSC BL00N
S
ATN
ATNB
BC0R
CA
CAB
BC0R ATI BSC CEB BSC
6 BC0R CNT CNT
CA
CAB
BC0R CEB CNT CAL
7 BKB C0AT C0AT CNT BNN CNT BNC CBI
8 CNT C0L C0L C0L CEB BNC
F}P
F}PB
CNT
9 C0AT BNC CPN CPN CNT BLCN BLCN BNC
1u F00B FLI EBC BNC BNC ICT ICT
F}P
F}PB
11 uNA7 uNA7 F00B EBC FPB IP ISN uNA7
12 ISN ICT uNA7 FPB uNA7 ISN LIBC BLCN
1S }FC ISN ISN uNA7 BLCN LFN L0T0 ISN
14 NAC }FC }FC ICT ICT L0T0 NAC }uS
1S NEu LPZ L0T0 ISN ISN LR NARC LIBC
16 NWC NAC LPZ }FC }uS
NA
NAB
NIC LNu
17 0N NEu NEu LPZ LPZ NWIBE NI NARC
18 PCEv 0N NWC NEu NAC NI NIKL NWC
19 PERC PCEv PCEv NWC NARC NIKL
0PN
0PNB
NI
2u PBA PBA PERC 0v NI 0RE 0RE NIKL
21 PIP PIP PBA PCEv 0N 0v 0v 0RE
22 PSE PX PIP PSE 0v PC0R PC0R 0v
2S PX RLC PX PX PSE PSE
PEC
PECB
PAX
24 RLC SCC RLC RLC PX PX PBA PSE
2S SCC SN
SNC
SNCB
SNPB RLC RLC PSE PX
26 SNB SNB SNPB S0C SCC SCC RLC RLC
27
SNC
SNCB
SNC
SNCB
S0C STR SNPB SNPB SNBC SCC
28 SNPB SNPB SPB 0RC S0C STR SNPB SNBC
29 vLL vLL 0RC v 0RC 0RC v 0RC
Su WEB WEB WEB WEB WEB WEB WEB WEB


GrowthIndex
iecomposition uate foi the pioposeu uiowth Inuex.

Table14GrowthIndex
1 ABA ABA AEv ABS AEv AEv AEv AEv
2 AC AuI AuI AEv AuI AuI AuI AP
S AuI ALI ALI AuI ALBI ALBI ALI AT
4 ALI AP AP ALI AP ALI AP BC0R
S AP BC0R BB0 AP BB0 AP CEB BB0
6 AT CNT C0L BB0 CEB
BC
BCB
CNT BPI
7
ATN
ATNB
C0L BuTL BPI CNT BC0R BNC BSC
8 BC0R BNC BNC C0L BuTL CEB ICT CAL
9 BNC EEI EBC BuTL BNC CNT ISN BNC
1u F00B FuEN EEI BNC EBC BNC L0T0 EEI
11 uNA7 FPB FPB EBC EEI ICT NARC uTCAP
12 ICT uNA7 ICT FuEN FuEN IP NBT IRC
1S ISN ICT ISN FPB FPB ISN NEu ISN
14 }FC }FC }FC ICT ICT L0T0 NWIBE }uS
1S LPZ LPZ }uS ISN ISN NAKE NIKL LPZ
16 NBT NBT LPZ }uS }uS NBT 0RE NARC
17 NEu NEu NEu LPZ LPZ NWIBE PC0R NBT
18 NER NER NER NBT NBT NIKL Pu0LB NWC
19 NWC NPI NWC NEu NWC 0RE PNB NWIBE
2u PCEv PCEv PAX NWC PNB PC0R PNX 0RE
21 PBA PNB PCEv PAX PX PNB PRC PAX
22 PX PX PBA PNB RCB PNX PTC PC0R
2S RLC RLC PNB PX RLC PX RCB PNB
24 SECB SECB PX RLC SCC RLC SCC RCB
2S SN SN RLC SCC SECB SCC SECB RLC
26 SNB
SNC
SNCB
SECB SECB SNB SECB SN SECB
27
SNC
SNCB
SNPB
SNC
SNCB
SN SNPB SNC SNB SN
28 SNPB 0BP SNPB SNPB 0BP SNPB SNC SNBC
29 vLL vLL 0RC 0RC 0RC 0BP SNBC SNPB
Su WEB WEB WEB WEB WEB 0RC SNPB 0BP

BasketComposition
ClassificationperSector
When the stocks making up the baskets weie classifieu accoiuing to theii iespective sectois, stocks fiom
the Inuustiial sectoi geneially uominateu all of the inuices. 0n the othei hanu, Nining anu 0il was the
least iepiesenteu sectoi in both Naiket anu uiowth Inuices, wheieas Seivices anu Financials hau the
least numbei of stocks in the Befensive anu Equity Inuex, iespectively.


Table15AverageBasketCompositionPerSector
Sector PSEi Market Defensive Equity Growth
Financials 12.16% 1S.42% 11.68% 4.79% 16.4S%
Inuustiial 27.S8% 21.2S% 24.99% 2S.SS% 24.86%
Boluing Fiims 2u.uS% 2u.8S% 22.2S% 16.84% 18.SS%
Piopeity 17.SS% 1S.8S% 18.uS% 11.99% 1S.4S%
Seivices 14.17% 14.S8% 11.21% 2S.2S% 18.74%
Nining & 0il 8.S2% 12.u8% 11.8S% 17.61% 8.17%

Compaieu with the Exchange Inuex, the Naiket Inuex was moie iepiesentative of the maiket, i.e., the
uiffeience between the numbeis of stocks pei sectoi was less foi the Naiket Inuex. 0n the othei hanu,
given that stocks fiom Inuustiial sectois aie mostly companies that pioviue utilities anu necessities to
inuiviuuals, then having a Befensive Inuex uominateu by stocks fiom this sectoi was quite expecteu.
ClassificationperMarketCapitalization
A stocks maiket capitalization
9
is classifieu accoiuing to the convention of the Naiketing Seivices
Bepaitment of the Exchange. Companies aie classifieu as small cap when theii maiket capitalization is
less than $SuuN, as miu cap when theii capitalization is between $SuuN anu $1B, anu as laige cap when
it goes beyonu $1B. Since these aie expiesseu in 0S uollais, the aveiage foieign exchange iate foi the
uate iange of the obseivations useu in the iecomposition will be useu (see Table 16) to conveit these to
Philippine pesos.

Table16MarketCapitalizationClassifications
RecompositionDate FOREX SmallCap MidCap LargeCap
Nay 2uu9 PBP44.47 < PBP1S.S42B PBP1S.S42B PBP44.47SB > PBP44.47SB
Nov 2uu9 PBP47.S9 < PBP14.218B PBP14.218B PBP47.S94B > PBP47.S94B
Nay 2u1u PBP47.64 < PBP14.291B PBP14.291B PBP47.6S7B > PBP47.6S7B
Nov 2u1u PBP46.61 < PBP1S.984B PBP1S.984B PBP46.61SB > PBP46.61SB
Nay 2u11 PBP4S.11 < PBP1S.SSSB PBP1S.SSSB PBP4S.11B > PBP4S.11B
Sept 2u11 PBP4S.99 < PBP1S.196B PBP1S.196B PBP4S.986B > PBP4S.986B
Nai 2u12 PBP4S.S1 < PBP12.994B PBP12.994B PBP4S.S1SB > PBP4S.S1SB
Sept 2u12 PBP4S.u1 < PBP12.9u2B PBP12.9u2B PBP4S.uu8B > PBP4S.uu8B

When the stocks making up the baskets weie classifieu accoiuing to theii maiket capitalization,
companies with laige maiket capitalization geneially uominateu most of the inuices, except foi the
Befensive anu Equity Inuices, which weie piimaiily uominateu by small cap companies. 0n the othei
hanu, the least iepiesenteu maiket capitalization classification vaiieu pei inuex.

9
The aveiage maiket capitalization of the stocks uuiing the uate iange of the obseivations useu in the iecomposition was
useu.


Table17AverageBasketCompositionsperMarketCapitalization
MarketCapitalization PSEi Market Defensive Equity Growth
Small Cap 19.9S% S2.Su% 62.SS% 44.9u% Su.u6%
Niu Cap 26.S9% Su.uu% 21.41% 29.89% S1.42%
Laige Cap SS.48% S7.Su% 16.u4% 2S.21% S8.S2%

Since smallei companies aie less likely to be affecteu by the maiket conuitions, then the Befensive Inuex
shoulu likely be uominateu by these companies, which was what happeneu with the saiu inuex. 0n the
othei hanu, similai to what happeneu when stocks weie classifieu pei sectoi, the Naiket Inuex was moie
iepiesentative than that of the PSEi when stocks weie classifieu accoiuing to theii maiket capitalization.

IndexPerformance
IndexLevel
Market Index. Though both the Naiket Inuex anu PSEi follow the same tienu, the Naiket Inuex giew
fastei (see Figuie 1). This is suppoiteu by the fact that the Naiket Inuex level was always highei than the
PSEi level fiom Sept 2uu9 onwaius. Asiue fiom that, peifoiming lineai iegiession on both PSEi anu
Naiket inuex, the slope of the Naiket Inuex was highei than that of PSEi (see Table 18). Since the slope
iepiesents the giowth iate of the inuex anu the Naiket Inuex has a highei giowth iate, then Naiket Inuex
giew fastei compaieu to the Exchange Inuex.
Defensive Index. Checking on the peifoimance of the Befensive Inuex, its inuex level hau a positive
tienu (see Figuie 2). Noieovei, fitting a stiaight line woulu give a slope of 4.791, which woulu inuicate
that the inuex hau a ielatively high giowth iate. Fuitheimoie, uefensive stocks peifoimeu quite well in
the pievious yeais. Also, its giowth iate was laigei than that of PSEi, which is expecteu, as this inuex
measuies stocks which pioviue stable eainings iegaiuless of maiket conuitions.

Equity Index. 0n the othei hanu, the equity inuex, while having a similai positive tienu, giew slowei
(see Figuie S). By fitting a stiaight line, its giowth iate is given as 2.S78, which is ielatively small
compaieu to the othei thiee inuices. This is expecteu, as this inuex focuseu on companies with capital
stiuctuie leaning towaius equity. Since such companies have moie equity than uebt, they aie geneially
less iisky. As such, theii expecteu ietuin woulu also be less than those of iisky companies.

GrowthIndex. Lastly, the uiowth Inuex giew fastei than any othei inuex (see Figuie 4), with the slope of
the fitteu stiaight line equal to 22.26. Bowevei, this coulu be attiibuteu to its initial giowth iate which is
ielatively veiy high. Since this inuex iepiesents the stocks with high giowth iate, then the inuex level
affiims this fact iegaiuing the stocks incluueu in the basket. Since the basket is composeu of stocks with
high potential giowth, then high giowth iate of the inuex level was a natuial consequence.


Figure1IndexPerformance

Figure2DefensiveIndexLevel


Figure3EquityIndexLevel

Figure4GrowthIndexLevel

Table18GrowthRate
PSEi Market Defensive Equity Growth
Slope S.4S1 4.97S 4.791 2.S78 22.26
CAGR S1.S7% 42.9S% 62.S1% 44.4u% 146.u1%


Compounded Annual Growth Rate. Consiueiing the compounueu annual giowth iate (CAuR)
1u
, oi the
iate of ietuin shoulu the instiument be investeu in a iiskless asset, all inuices hau the same iesult as that
of the slope of the fitteu line, except foi the Equity Inuex, which hau a highei iate than that of the Naiket
Inuex while having a lowei slope. 0n the othei hanu, consistent with piioi iesults, the Naiket Inuex hau
outpeifoimeu the PSEi.

LogReturns
Taking the aveiage log ietuins of PSEi anu the Naiket Inuex, the lattei iegisteieu highei ietuins (see
Table 19). Though the Naiket Inuex may hau the highei aveiage anu meuian values foi its log ietuins, it
was moie volatile, as it hau a highei maximum ietuin anu a lowei minimum ietuin, anu hau highei
stanuaiu ueviation. Though, when the coefficient of vaiiation is taken into account (stanuaiu ueviation
pei mean ietuin, i.e.,
o
p
, ), the Naiket Inuex was less volatile than the PSEi.

Table19KeyStatisticsoftheLogReturnsoftheIndices
Min -u.uS267 -u.uS9S9 -u.u8949 -u.u61S2 -u.u6Su7
Median u.uu129 u.uu1S2 u.uu177 u.uu12u u.uu29u
Max u.u4984 u.uSu61 u.u7S1u u.u8u21 u.u616S
Average u.uu112 u.uu146 u.uu198 u.uu1Su u.uuS68
StandardDeviation u.u1u89 u.u12S2 u.u14uu u.u1424 u.u1428
CoefficientofVariation 9.76S77 8.4S92S 7.u7u76 9.48121 S.88u98

Bespite having auuitional ciiteiia, each inuex hau the same, oi at least ielatively close, stanuaiu
ueviations. Since these inuices hau the factoi loauings of the fiist PCA as its fiist ciiteiion, then they
woulu likely have the same vaiiation captuieu in the saiu piincipal component anaylsis. Bowevei, theii
coefficient of vaiiations woulu no longei be appioximately equal, as the saiu coefficients take into
account the aveiage log ietuin, which vaiieu pei inuex.

Similai to how theii iespective inuex levels peifoimeu, the statistics of the log ietuins of most of the
othei inuices weie consistent with theii natuie. The Befensive Inuex hau the lowei coefficient of
vaiiation of vaiiation while having a highei aveiage log ietuin when compaieu to the Naiket Inuex anu
PSEi. This is a pioof that this inuex is capable of pioving stable
11
eainings, iegaiuless of the maiket
conuition. 0n the othei hanu, the uiowth Inuex still hau the highest aveiage log ietuins, while having the
lowest coefficient of vaiiation. The peifoimance of its log ietuins is a iealization of the high potential

1u
This is given by [
End VaIuc
InItIaI VaIuc
1
n
- 1, wheie n is the numbei of inclusive yeais consiueieu.
11
The eainings aie saiu to be stable, as its coefficient of vaiiation was ielatively lowei than that of the Naiket Inuex anu
PSEi.


giowth the inuex was supposeu to captuie. Bowevei, the Equity Inuex, though having log ietuins
between that of the Naiket anu Befensive Inuices, hau a highei coefficient of vaiiation. This was because
the saiu inuex hau a geneially low aveiage ietuin while having a similai stanuaiu ueviation with the
othei inuices. Fuitheimoie, since uebtheavy stocks aie aumitteu (as long as they hau high R0E), then
basket woulu hau moie iisk in it, thus causing the oveiall iisk level of the basket to go up.

IndexBasketVolatility
Even though a stock inuex is peifoiming well, investois woulu geneially want a less volatile basket. They
woulu piefei that changes to the basket uuiing iecomposition uates woulu be minimal. To uesciibe the
volatility of the pioposeu inuex, the following numbeis woulu be consiueieu.
1. Retained Stocks. An inuex basket coulu be consiueieu less volatile if most of the stocks
cuiiently in the basket woulu be ietaineu in the next iecomposition uate. Bowevei, this only
measuies how many stocks weie ietaineu. It uoes not take into account foi how long those
stocks woulu be ietaineu. It may be possible that 1S stocks woulu be ietaineu in a iecomposition
uate, anu anothei 2u foi the next iecomposition, but the two sets of 1S stocks weie not the same
as, at woist, completely uiffeient. What is only suie is that 2u stocks weie ietaineu.
2. Length in Basket. Anothei way to uesciibe inuex basket volatility is thiough the stocks in the
basket. A basket is ielatively less volatile if the stocks compiising it appeai in the basket often
anu consecutively. If the stocks length in basket is the numbei of times it is in a basket
consecutively, then the length in basket is close oi appioximately equal to the numbei of
iecompositions consiueieu, foi it to be consiueieu less volatile.
Taken togethei, the two afoiementioneu numbeis pioviue an oveiview of the uynamics of the basket.
The highei the aveiage ietaineu stocks anu aveiage stocks length in basket is the less volatile the inuex
is. This is mainly because, as moie stocks aie ietaineu pei iecomposition, the lessei chances of having a
uiffeient set of stocks being ietaineu in the next iecomposition. Likewise, the longei the aveiage length
the stock is in a basket consecutively is, the lessei chances of othei stocks enteiing the basket uuiing
iecomposition.

Table20IndexBasketVolatilityMeasure
AverageRetainedStocks 29.4S 2u 17.86 21.86 22
AverageLengthinBasket S.S8 2.87 2.1S 2.69 2.96

uiven the numbeis (see Table 2u), the PSEi was less volatile than any of the composeu inuex. Similaily, all
foui inuices weie geneially volatile, as the numbei aveiage numbei of ietaineu stocks was just
appioximately 2u, anu the aveiage stocks length in the basket was two basket iecompositions. This
coulu be attiibuteu to the fact that the foui inuices weie baseu fiom the PCA loauings. This, in tuin, was


uepenuent on the stocks maiket movements. Thus, eveiy iecomposition was highly uepenuent on the
stocks peifoimance, which woulu then explain why these inuices aie iathei volatile, as theii
peifoimance is, in itself, unpieuictable anu volatile.

ForecastingtheBasketComposition
Implementing the inuex methouology foi obseivations fiom }anuaiy 2, 2u12 to Becembei 28, 2u12 will
pioviue a foiecast foi the basket composition on the Naich 2u1S iecomposition (see Table 21).
Auuitional infoimation iegaiuing the foiecasteu basket aie also pioviueu, such as the baskets
compositions (see Table 22), anu which stocks aie moie likely to uiive theii iespective basket, given
theii laige maiket capitalization as of Becembei 28, 2u12 (see Table 2S).

Table21ForecastedBasketsforMarch2013
Market Defensive Equity Growth
AEv EBC NIKL AEv EBC NPI ABu BNC Pu0LB AEv EEI 0RE
AuI EEI 0RE AuI EEI NWC AEv FE0 PRC AuI EW PAX
ALI ELI Pu0LB AP EvER NIKL AuI uNA7 PSE AP FuEN PIP
AP ICT PIP AP0 EW PAX AP LRI PX BPI FPB PRC
BL00N IP PXP BPI FuEN PBA AT NARC RLC CAL ICT RCB
BPI LRI RCB BSC FLI PNX BC0R NIKL SCC CBI }uS SECB
CAL LTu RLC CAT FPB PRC BSC 0RE STI CNT NARC SEvN
CBI NEu STI CBI }uS RCB CAL 0v 0RC CPu NEu 0BP
BIZ NPI 0BP CNT LPZ 0BP CBI PAX vvT BNC NWC vvT
BNC NWC 0RC BNC NEu vvT CNT PEC
PECB
WEB EBC NWIBE WEB
Table22BasketCompositions
Sector
Financials 1u% 1S% S% 17%
Inuustiial 27% SS% 19% SS%
Boluing Fiims 1S% 2S% 1S% 17%
Piopeity 17% 1S% 6% 1u%
Seivices 2u% 1u% 29% 2u%
Nining & 0il 1S% 7% 29% S%
MarketCapitalization
Small Cap 27% Su% 26% 27%
Niu Cap 2u% S7% 2S% SS%
Laige Cap SS% SS% S2% 4u%

Table23BasketDrivers
SN 16.7S% NBT 16.79% }uS 16.9u% SN 17.6u%
BPI 11.79% }uS 12.82% 0RC 14.97% BPI 12.4u%
AuI 11.78% AP 12.SS% AEv 1u.uS%


5.CONCLUSION
Summary
This papei intiouuceu an inuex methouology that was baseu on the iesults of piincipal component
analysis. The basic inuex methouology is composeu of thiee steps. Fiist, a piincipal component analysis is
applieu on the log ietuins anu volume tuinovei of the stocks. Stocks aie then iankeu baseu on theii
absolute PC1 loauings. Seconu, stocks aie iankeu baseu on ceitain financial measuies. Lastly, the stocks
aie iankeu baseu on theii ianks on all of the ciiteiia useu. Ceitain aujustments aie maue to account foi
uelisteu stocks, oi stocks which have A anu B shaies. Also, in case of ties, financial measuies aie useu
to bieak the tie.

Bespite being simple, the pioposeu methouology was moie objective anu hau moie statistical basis
compaieu to the cuiient inuex methouology. The basis of the basket was simply a stocks maiket
movement anu financial position. As such, the ciiteiia foi the inuices weie easiei to unueistanu anu
explain. The membeis of an inuex basket weie simply the maiket moveis anu those that meet the
financial qualifications of the inuex, as measuieu by ceitain financial measuies. What uiffeientiate the
inuices fiom each othei weie the financial measuies useu as auuitional ciiteiia.

0f the foui inuices composeu, only the Naiket Inuex was compaiable to an existing inuex. This is because
the saiu inuex attempts to measuie the oveiall peifoimance of the maiket using the most active stocks,
similai to the natuie of PSEi. Computing foi theii iespective inuex level, the ietuins of the pioposeu
inuex was highei than that of the cuiient. The statistics of the log ietuins, as well as the giowth iate of
the inuex level of the Naiket Inuex weie both highei than that of PSEi. Fuitheimoie, when the basket
composition was analyzeu, the Naiket Inuex was moie iepiesentative of the maiket since the numbei of
stocks pei sectoi anu pei maiket capitalization was closei than that of the Exchange inuex. Bence, the
Naiket Inuex hau outpeifoimeu the PSEi.

The thiee othei inuices weie incompaiable to any othei existing inuex. Computing foi theii iespective
level, theii ietuins weie consistent to how they weie uefineu. Bowevei, this was not easily obseiveu in
the Equity Inuex. Bespite having a slope consistent with its uefinition, the CAuR anu the statistics of its
log ietuins hau contiaiy iesults. Wheieas Equity Inuex was expecteu to have lowei ietuins anu lessei
iisks, the log ietuins hau a highei aveiage than that of the Naiket anu PSEi, anu hau a highei coefficient
of vaiiation, meaning it was moie volatile, thus moie iisky. This coulu be attiibuteu to the fact that stocks
incluueu in the basket eithei have high BE, oi low BE but high R0E.


Bespite outpeifoiming the cuiient inuex anu being moie iepiesentative of the maiket infoimation, all
foui inuices hau one majoi uiawback: they weie moie volatile than that of the cuiient. The baskets often
changeu uuiing iecomposition. While theie was nothing wiong with such, most investois woulu piefei a
less volatile inuex basket. The volatile natuie of the foui inuices can be attiibuteu to PCA. Since PCA was
baseu on theii log ietuins anu volume tuinovei, which is by natuie volatile, then the iesulting basket
fiom this methouology woulu also be volatile.

Recommendations
Asiue fiom the thiee inuices pioposeu, seveial othei inuices coulu be exploieu. This can be uone by
consiueiing othei financial measuies, such as uiviuenu yielu, ietuin on investment, etc. Bowevei, the
choice of financial measuie shoulu be able to uefine the natuie of the inuex being cieateu. Also, the
iesults of the piincipal component analysis shoulu still be incluueu as the fiist two ciiteiia.

Since the methouology is heavily baseu on piincipal component analysis, then it is also iecommenueu to
intiouuce iefinements in the fiist phase. Consiuei auuing a nonnegativity constiaint to the factoi
loauings, similai to what was uone by Affleckuiaves anu Noney (1979). The saiu authois useu quauiatic
piogiamming to incoipoiate such constiaint. The ieason foi the saiu constiaint is that, foi some
investois, the negative PC1 loauings uo not caiiy any inheient meaning. As such, having all positive
loauings woulu make the iesults of the PCA acceptable to a wiuei iange of investois. 0thei possible
iefinement coulu be the inclusion of othei PC loauings. Theii inclusion, anu the loauings possible
inteipietation, howevei, shoulu be justifieu.

Impiovements in the thiiu phase coulu also be uone. Recall that, cuiiently, the ianks of the stock aie just
auueu, anu then these sums aie useu as a basis foi the ianking in the thiiu phase, i.e., each ciiteiia useu
aie of equal weights. Thus, it is suggesteu to intiouucing a uiffeient ianking system baseu on the uiffeient
ciiteiia useu, wheie the ianks in each ciiteiion uo not have equal weights. To make the inuices moie
consistent with its uefinition, emphasis shoulu be given on the financial measuie ciiteiia.

Lastly, in computing the inuex level, the cuiient foimula of the PSEi was useu. It is then suggesteu to
exploie othei ways to compute foi an inuex. Noie so, it is iecommenueu to have an inuex computation
that coulu incoipoiate the financial measuies useu in the seconu phase, anu not just iely on the stocks
piices anu fiee float maiket capitalization.


REFERENCES
Affleckuiaves, }., Tioskie, C., & Noney, A. (1979), A Piincipal Component Inuex Subject to Constiaints,
ietiieveu fiom http:www.iassa.co.zaaiticlesu14_sep1979_u4.puf
Amenc, N., et al. (2u1u), Efficient Equity Inuices: Towaius a New Paiauigm, ietiieveu fiom
http:www.ftse.comInuicesFTSE_EBBEC_Risk_Inuex_SeiiesFTSE_Euhec_Risk_Efficient_Whitepap
ei.puf
Beta:Gaugingpricefluctuations. (2u12, Nov 2S), ietiieveu fiom
http:www.investopeuia.comaiticlesu11u24u1.asp
Biigham, E., & Bouston, }. (2uu9), FundamentalsofFinancialManagementTwelfthEdition, 0SA: South
Westein Cengage Leaining.
Biake, P., Sustainable giowth, ietiieveu fiom
http:euuc.jmu.euu~uiakeppFINS62iesouicessgi.puf
Feeney, u., & Bestei, B. (1964), Stock Naiket Inuices: A Piincipal Component Analysis, Pittsbuig,
ietiieveu fiom http:cowles.econ.yale.euuPcmm19m19uS.puf
GroundRulesfortheManagementoftheFTSECyclicalandDefensiveIndexSeries. (2u12 Bec), ietiieveu
fiom
http:www.ftse.comInuicesFTSE_Cyclical_anu_Befensive_Inuex_SeiiesBownloausFTSE_Cyclical
_anu_Befensive_Inuex_Seiies_uiounu_Rules.puf
}olliffe, I. (2uu2), PrincipalComponentAnalysisSecondEdition, New Yoik: Spiingei.
PSE: Recoiubieaking peifoimance, TheManilaTimes, ietiieveu fiom
http:www.manilatimes.netinuex.phpbusinesstopbusinessnewsS29SSpseiecoiubieaking
peifoimance
RussellU.S.EquityIndexesConstructionandMethodology. (2u12 Aug), ietiieveu fiom
http:www.iussell.cominuexesuocumentsNethouology.puf
Tsay, R. (2uuS), AnalysisofFinancialTimeSeriesSecondEdition, New }eisey: }ohn Wiley & Sons, Inc.
van Boine, }., & Wachowicz, }. (2uu8), FundamentalsofFinancialManagementThirteenthEdition,
Englanu: Peaison Euucation Limiteu.

Awit, Briones, Manalang A

APPENDIXA:RCODEPCAFORLOGRETURNS
basket PCA = f unct i on( dat e, m, f i r st Dat e) {
dat e = t oSt r i ng( dat e)
f i l eName = past e( " NewBasket PCA " , dat e, " . csv" , sep=" " )

dat a = r ead. csv( f i l eName)
st ocks = c( )
count = 1
x = nr ow( dat a)
f or ( i i n 1: x) {
y = t oSt r i ng( dat a[ i , 2] )
i f ( ! ( y %i n%st ocks) ) {
st ocks[ count ] = y
count = count + 1
}
}

pr i ces = c( )
f or ( i i n 1: l engt h( st ocks) ) {
y = dat a[ dat a$St ock==st ocks[ i ] , ] [ , 3]
z = dat a[ dat a$St ock==st ocks[ i ] , ] [ , 1]
w = l engt h( y)
i f ( w==m) {
Dat e = z
}
i f ( ! ( w==m) ) {
i f ( z[ 1] ==f i r st Dat e) {
y[ w+1: m] = 0
}
el se{
y[ w: m] = y
y[ 1: ( m- w) ] = 0
}
}
pr i ces = cbi nd( pr i ces, y)
}
col names( pr i ces) = st ocks

pr i ces. l = l og( pr i ces)
pr i ces. d = di f f ( pr i ces)
pr i ces. demean = t ( t ( pr i ces. d) - col Means( pr i ces. d) )
pr i cesPCA = pr comp( pr i ces. demean)

l oadi ngs = dat a. mat r i x( pr i cesPCA$r ot at i on)

numPC = ncol ( l oadi ngs)
t ot al SDev = sum( pr i cesPCA$sdev^2)
pr op=c( )
cpr op=c( )
r esul t PCA = st ocks
namePCA = c( " St ock" )
f or ( i i n 1: numPC) {
r esul t PCA = cbi nd( r esul t PCA, abs( l oadi ngs[ , i ] ) )
namePCA[ i +1] = past e( " PC" , i , sep=" " )

sum= 0
f or ( j i n 1: i ) {
sum= sum+ pr i cesPCA$sdev[ j ] ^2
}
pr op[ i ] = pr i cesPCA$sdev[ i ] ^2/ t ot al SDev
cpr op[ i ] = sum/ t ot al SDev
}
r esul t PCA = cbi nd( r esul t PCA, st ocks)
namePCA[ numPC+2] = " St ock"
col names( r esul t PCA) = namePCA

t emp = t ( c( r ep( " " , numPC+2) ) )

Awit, Briones, Manalang B

sdev = t ( c( " St d Dev" , pr i cesPCA$sdev, " " ) )
pr op = t ( c( " Pr opor t i on" , pr op, " " ) )
cpr op = t ( c( " Cumul at i ve" , cpr op, " " ) )
r esul t PCA = r bi nd( r esul t PCA, t emp, sdev, pr op, cpr op)

newFi l eResul t = past e( " PCA " , dat e, " Resul t . csv" , sep=" " )
wr i t e. t abl e( r esul t PCA, f i l e=newFi l eResul t , sep=" , " , r ow. names=F)
}

basket Dat e = c( " 2009 May" , " 2009 Nov" , " 2010 May" , " 2010 Nov" , " 2011 May" , " 2011 Sep" , " 2012
Mar " , " 2012 Sep" , " 2013 Mar " )

m= c( 246, 245, 242, 241, 244, 249, 249 , 247, 244)
f i r st Dat e = c( " 1/ 2/ 08" , " 7/ 1/ 08" , " 1/ 5/ 09" , " 7/ 1/ 09" , " 1/ 4/ 10" , " 7/ 1/ 10" , " 1/ 3/ 11" , " 7/ 1/ 11" ,
" 1/ 2/ 12" )
f or ( i i n 8: 8) {
basket PCA( basket Dat e[ i ] , m[ i ] , f i r st Dat e[ i ] )
}

Awit, Briones, Manalang C

APPENDIXB:RCODEPCAFORVOLUMETURNOVER
basket PCA = f unct i on( dat e, m, f i r st Dat e) {
f i l eName = past e( " NewBasket PCA " , dat e, " . csv" , sep=" " )

st ocks = c( )
count = 1
x = nr ow( dat a)
f or ( i i n 1: x) {
y = t oSt r i ng( dat a[ i , 2] )
i f ( ! ( y %i n%st ocks) ) {
st ocks[ count ] = y
count = count + 1
}
}

vol ume = c( )
f or ( i i n 1: l engt h( st ocks) ) {
y = dat a[ dat a$St ock==st ocks[ i ] , ] [ , 3]
z = dat a[ dat a$St ock==st ocks[ i ] , ] [ , 1]
w = l engt h( y)
i f ( w==m) {
Dat e = z
}
i f ( ! ( w==m) ) {
i f ( z[ 1] ==f i r st Dat e) {
y[ w+1: m] = 0
}
el se{
y[ w: m] = y
y[ 1: ( m- w) ] = 0
}
}
vol ume = cbi nd( vol ume, y)
}
col names( vol ume) = st ocks

vol ume. demean = t ( t ( vol ume) - col Means( vol ume) )
vol umePCA = pr comp( vol ume. demean)

l oadi ngs = dat a. mat r i x( vol umePCA$r ot at i on)

numPC = ncol ( l oadi ngs)
t ot al SDev = sum( vol umePCA$sdev^2)
pr op=c( )
cpr op=c( )
r esul t PCA = st ocks
namePCA = c( " St ock" )
f or ( i i n 1: numPC) {
r esul t PCA = cbi nd( r esul t PCA, abs( l oadi ngs[ , i ] ) )
namePCA[ i +1] = past e( " PC" , i , sep=" " )

sum= 0
f or ( j i n 1: i ) {
sum= sum+ vol umePCA$sdev[ j ] ^2
}
pr op[ i ] = vol umePCA$sdev[ i ] ^2/ t ot al SDev
cpr op[ i ] = sum/ t ot al SDev
}
r esul t PCA = cbi nd( r esul t PCA, st ocks)
namePCA[ numPC+2] = " St ock"
col names( r esul t PCA) = namePCA

t emp = t ( c( r ep( " " , numPC+2) ) )
sdev = t ( c( " St d Dev" , vol umePCA$sdev, " " ) )
pr op = t ( c( " Pr opor t i on" , pr op, " " ) )

Awit, Briones, Manalang D

cpr op = t ( c( " Cumul at i ve" , cpr op, " " ) )
r esul t PCA = r bi nd( r esul t PCA, t emp, sdev, pr op, cpr op)

newFi l eResul t = past e( " PCA " , dat e, " Resul t . csv" , sep=" " )
wr i t e. t abl e( r esul t PCA, f i l e=newFi l eResul t , sep=" , " , r ow. names=F)
}

Mar " , " 2012 Sep" , " 2013 Mar " )

m= c( 246, 245, 242, 241, 244, 249, 249 , 247, 244)
f i r st Dat e = c( " 1/ 2/ 08" , " 7/ 1/ 08" , " 1/ 5/ 09" , " 7/ 1/ 09" , " 1/ 4/ 10" , " 7/ 1/ 10" , " 1/ 3/ 11" , " 7/ 1/ 11" ,
" 1/ 2/ 12" )
f or ( i i n 8: 9) {
basket PCA( basket Dat e[ i ] , m[ i ] , f i r st Dat e[ i ] )
}

Awit, Briones, Manalang E

APPENDIXC:RCODEBETAESTIMATION
bet aRegr ess = f unct i on( dat e) {
f i l eName = past e( " St ockPr i ces " , dat e, " . csv" , sep=" " )

bet a = c( )
nS = ncol ( dat a)
pse = dat a[ , 1]
st ocknames = names( dat a) [ - 1]

f or ( i i n 2: nS) {
st ock=c( )
st ockA = dat a[ , i ]
n = l engt h( st ockA)
st ar t = NA
end = NA
i f ( st ockA[ 1] ==0 | st ockA[ n] ==0) {
st ar t = 1
f or ( j i n 1: n) {
i f ( j ! =n) {
i f ( st ockA[ j ] ==0 && st ockA[ j +1] ! =0) {
st ar t = j +1
next
}
}
i f ( st ockA[ j ] ! =0) {
st ock = c( st ock, st ockA[ j ] )
}
el se i f ( l engt h( st ock) ! =0) {
end = j - 1
br eak
}
end = j
}
st ock = st ockA[ st ar t : end]
psei = pse[ st ar t : end]
}
el se {
st ock = st ockA
psei = pse
}
b = l m( st ock~psei )
bet a[ i - 1] = b$coef [ 2]
}

bet aLi st = cbi nd( st ocknames, bet a)
newFi l eResul t = past e( " Bet a " , dat e, " Resul t . csv" , sep=" " )
wr i t e. t abl e( bet aLi st , f i l e=newFi l eResul t , sep=" , " , r ow. names=F)
}

Mar " , " 2012 Sep" , " 2013 Mar " )

f or ( i i n 1: 9) {
bet aRegr ess( basket Dat e[ i ] )
}

Awit, Briones, Manalang F

APPENDIXD:BASKETCOMPOSITION:SECTOR
Defensive
Index
May
2009
Nov
2009
May
2010
Nov
2010
May
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Financials 1 2 1 6 6 4 S 6 4
Inuustiial 8 9 1u 1u 7 8 4 6 1u
Boluing Fiims 6 S 1u 8 6 S 9 8 7
Piopeity 7 8 S 4 4 6 7 4 4
Seivices S S 2 1 S 2 2 S S
Nining & 0il S S 1 u S 9 6 S 2

EquityIndex
May
2009
Nov
2009
May
2010
Nov
2010
May
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Financials 2 1 1 S 1 1 2 1 1
Inuustiial 1u 8 1S 9 6 8 4 6 6
Boluing Fiims 4 S S S 8 2 7 6 4
Piopeity S 6 S S 2 S S S 2
Seivices 6 7 6 S 8 8 8 7 9
Nining & 0il 4 S S S S 9 8 8 9

GrowthIndex
May
2009
Nov
2009
May
2010
Nov
2010
May
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Financials 2 S 4 6 6 S S 7 S
Inuustiial 8 9 1u 6 9 7 7 S 1u
Boluing Fiims 8 6 S 6 S S S 7 S
Piopeity S S 4 4 S 4 4 4 S
Seivices 6 4 S S 4 6 6 4 6
Nining & 0il 2 1 1 2 2 6 S S 1

MarketIndex
May
2009
Nov
2009
May
2010
Nov
2010
May
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Financials 2 S S 4 S S S 8 S
Inuustiial 8 S 8 6 S 8 6 S 8
Boluing Fiims 6 6 4 7 8 6 8 S 4
Piopeity 6 S S S S S 7 4 S
Seivices 4 4 S S 4 4 4 S 6
Nining & 0il 4 4 4 S S 2 2 S 4

PSEi
May
2009
Nov
2009
May
2010
Nov
2010
May
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Financials 4 S 4 4 4 S S S 4
Inuustiial 11 9 9 8 8 8 8 9 11
Boluing Fiims 4 S S 7 7 7 7 7 4
Piopeity S S S S S 6 6 6 S
Seivices S S 6 4 4 4 4 S S
Nining & 0il S S S S S 2 2 2 S

Awit, Briones, Manalang G

APPENDIXE:BASKETCOMPOSITION:MARKET
CAPITALIZATION
Defensive
Index
May
2009
Nov
2009
May
2010
Nov
2010
May
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Small Cap 2S 2S 22 1S 1S 21 21 18 9
Niu Cap 7 S 7 1u 8 7 6 S 11
Laige Cap 2 S 1 S 9 S 4 11 1u

EquityIndex
May
2009
Nov
2009
May
2010
Nov
2010
May
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Small Cap 18 2u 14 11 1u 11 16 1S 8
Niu Cap 9 6 1S 14 9 9 8 7 7
Laige Cap S S S 6 11 11 9 11 16

GrowthIndex
May
2009
Nov
2009
May
2010
Nov
2010
May
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Small Cap 1S 1S 11 7 7 6 6 9 8
Niu Cap 1u 6 12 1S 9 12 1u S 1u
Laige Cap 9 1u 8 1u 14 1S 14 16 12

MarketIndex
May
2009
Nov
2009
May
2010
Nov
2010
May
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Small Cap 11 14 11 11 8 8 1u S 8
Niu Cap 11 7 11 11 8 8 9 7 6
Laige Cap 8 9 8 8 14 14 11 18 16

PSEi
May
2009
Nov
2009
May
2010
Nov
2010
May
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Small Cap 9 11 8 7 6 S S S 9
Niu Cap 9 7 9 11 8 8 7 7 9
Laige Cap 14 14 1S 1S 17 19 2u 2u 14

On Stock Market Index Methodology

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

On Stock Market Index Methodology

Uploaded by

Copyright:

Available Formats

OnStockMarketIndexMethodology:

Table 1 Bate Range foi PCA ...................................................................................................................................................................... 16

be a p 1 vectoi of ianuom vaiiables. Assume that all seconu moments of Xexist.

, such that vai(

X such that vai(

wheie z anu aie Lagiange multiplieis. Biffeientiating with iespect to u

You might also like