Intended for New Graduates
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Emily, a new graduate with co-concentrations (Econ & Finance), is interviewing for Equity Analyst position.
Question # 1
Interviewer: Explain to us the basic difference between these two indices.
Emily: While the S&P 500 index measures the performance of 500 large-cap stocks, the Russell 2000 index measures the performance of 2000 small-cap stocks. S&P 500 is the most widely followed stock market index.
Question # 2
Interviewer: Is there a market definition of large-cap stock? Also, can you name a few large caps?
Emily: Typically, a large-cap company has a market value of at least $10 Billion. Microsoft, Apple, Amazon, Google and Facebook are examples of large-caps.
Question # 3
Interviewer: Can S&P 500 include one such large-cap stock that is listed on Nikkei only?
Emily: No. S&P 500 comprises large-cap stocks that are listed on US Exchanges.
Question # 4
Interviewer: The data table shows S&P 500 has higher volatility than Russell's. What "quick" metric did we use to arrive at these volatility figures? And why?
Emily: I believe the quick metric you used is the Coefficient of Variation (commonly known by its short form COV). COV is the ratio of standard deviation to mean. Since you are making inter-index comparisons, you used the "normalized" metric.
Question # 5
Interviewer: By glossing over these two graphs, do you notice any similarity?
Emily: Yes, between August and December, they both produced linear growth. Spectacular growth, indeed!
Question # 6
Interviewer: Any striking dissimilarity, per se?
Emily: Yes, the correction in August was way more pronounced for Russell than that of S&P's.
Question # 7
Interviewer: By looking at the data table, can you tell us how S&P outperformed Russell in terms of overall growth?
Emily: Because S&P produced 8% growth between January and August, whereas Russell remained on a slippery slope, failing to hang on to its gains.
Question # 8
Interviewer: To take advantage of these indices, what investment vehicles would you recommend to our clients?
Emily: Index Funds, Index ETFs, S&P Futures and Options, etc.
Question # 9
Interviewer: Of these two indices, which one would you recommend to our conservative clients? Or, would you recommend both?
Emily: Russell 2000 would not be appropriate for them.
Good Luck!
-Sid Som, MBA, MIM
President, Homequant
homequant@gmail.com
