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To control for size, the selection universe for Directional indexes uses the Dow
Jones US Large-Cap TSM.
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Beta is perhaps one of the most important indicators of a stock’s risk or volatility.
It's a measure that aims to provide insight into the movements of a given stock
relative to its market movements. Beta values are calculated using daily total returns
for the past 90 days.
Transparent Value breaks the Dow Jones US Large-Cap TSM into three groups:
1. companies with betas higher than one
2. companies with betas lower than one
3. 400 companies that have betas closest to one.
Beta measures the amount which a stock tends to increase or decrease in value relative
to the change in the value of the overall stock market. For example, if the market
increases by 5%, a stock with a beta of 1 would tend to also increase by 5% (5%
x 1.0), while a stock with a beta of 0.5 would tend to increase by 2.5% (5% x 0.5),
and a stock with a beta of 1.5 would tend to increase by 7.5% (5% x 1.5).
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Once these groups are selected they are further refined to account for momentum,
which is a measurement of the speed in a stock’s price changes. Momentum is defined
by a stock’s 6 month total return.
We believe in regards to market trends, this is a useful signal, but not a guarantee,
as to the strength or weakness in a given stock price. Transparent Value’s selection
process seeks to capture companies with high momentums and avoids ones with low
momentums. We feel that once a trend is established, a given stock price is more
likely to follow in that direction than to move against the trend. However, past
performance is not a guarantee of future trends or stock performance.
The beta screen selected stocks are split into two categories, high and low, with
200 components in each category.
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Through size control, beta values and momentum screens, a selection universe is
defined.
Transparent Value calculates the RBP® probability for each stock
within the selected universe, in accordance to the RBP® methodology.
We split the stocks with High Momentum components into two categories, high and
low, based on their RBP® scores. Each category is comprised of 100
stocks.
The 100 stock components with the highest RBP® probabilities within each beta and
momentum category are selected for the indexes. Following the selection, the components
are weighted by their RBP® scores.
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