# DDM for an Index

In Schweser book 2 page 130 it describes how to value an idex using the DDM giving the following calculation for one of the estimates. stock index value = 21.78 USD (divs) / 0.104 ® - 0.078 (g) = 838 USD It then compares this value to the S&P value of 1450 USD. Sureley it is incorrect to state and index in dollar terms because the level will depend on the arbitrary index divisor chosen at its inception. I would assume that the dividend is supposed to be in terms of index points? This is the only way that the dividend would then adjust for a different index divisor. Otherwise comparing one inex to the other would give incomparable results. What do you guys think?

You are right in general. One needs to be consistent in methodology of dividend and market value calculation. However, for this particular example, the methodology is consistent. The dividend given is most probably provided by SP, something you can do yourself by downloading from http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l-- See index earnings link on the left. In calculating the dividend, SP used the same weighting calculation (which as you recall: market weighting), rebalancing, rebasing and the whole works as the one they use to arrive at index value. In fact, you can see that SP uses the same method of calculating return/yield as Schweser uses (e…g, comparing cash dividend with index value (in USD) in their spreadsheet.

It seems that you need to be registered in order to download the sheet. OK so they apply the index methodolgy to the dividend which will tell you how many points will come off the index. In this case it should be stated in point terms and not cash terms…

Registration is free, but you need to give them your email address. It takes 10 seconds to register. >OK so they apply the index methodolgy to the dividend which will tell you how many points will come off the index. >In this case it should be stated in point terms and not cash terms… What is difference then, if you can buy the same index point in real dollars as in numerous ETF’s? Anyway, SP itself puts \$ in their index since they bake all the adjustment calculation into a single number called DIVISOR. It is SP500 shares equivalent (in millions) to be divided by (float adjust) market cap, so the SP500 index is actually real dollar/share. E.g. per sep 30 2009. the (float adjusted) total market cap of SP 500 is 9336.51 Billion USD the divisor is 8832.37 (millions shares equivalent) thus the index is 9336.51/8832.37*1000= 1057.08 USD

OK thanks for clearing this one up.