Lec 5.1

Investment and Portfolio Management
KSE-100 INDEX
The primary objective of the KSE100 index is to have a benchmark by which the stock price
performance can be compared to over a period of time. In particular, the KSE 100 is designed to
provide investors with a sense of how the Pakistan equity market is performing. Thus, the
KSE100 is similar to other indicators that track various sectors of the Pakistan economic activity
such as the gross national product, consumer price index, etc.
The KSE-100 Index was introduced in November 1999 with base value of 1,000 points. The
Index comprises of 100 companies selected on the basis of sector representation and highest
market capitalization, which captures over 80% of the total market capitalization of the
companies listed on the Exchange. Out of the following 35 Sectors, 34 companies are selected
i.e. one company from each sector (excluding Open-End Mutual Fund Sector) on the basis of the
largest market capitalization and the remaining 66 companies are selected on the basis of largest
market capitalization in descending order. This is a total return index i.e. dividend, bonus and
rights are adjusted.
List of Sectors
1 Open-end Mutual Funds

2 Close-end Mutual Funds
3 Modarabas
4 Leasing Companies
5 Investment Banks/Inv. Cos./Securities Cos.
6 Commercial Banks
7 Insurance
8 Textile Spinning
9 Textile Weaving
10 Textile Composite
11 Woolen
12 Synthetic & Rayon
13 Jute
14 Sugar & Allied Industries
15 Cement
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16 Tobacco
17 Refinery
18 Power Generation & Distribution
19 Oil & Gas Marketing Companies
20 Oil & Gas Exploration Companies
21 Engineering
22 Automobile Assembler
23 Automobile Parts & Accessories
24 Cables & Electric Goods
25 Transports
26 Technology & Communication
27 Fertilizers
28 Pharmaceuticals
29 Chemical
30 Paper & Board
31 Vanaspati & Allied Industries
32 Leather & Tanneries
33 Food & Personal Care Products
34 Glass & Ceramics
35 Miscellaneous
STOCK SELECTION RULES
The selection criteria for stock inclusion in the recomposed KSE100 Index are:
Rule # 1 Largest market capitalization in each of the 34 Karachi Stock Exchange sectors
excluding Open-end Mutual Fund Sector;
Rule # 2 The remaining index places (in this case 66) are taken up by the largest market
capitalization companies in descending order.
Rule # 3 Company which is on the Defaulters’ Counter and/or its trading is suspended, declare
Non-Tradable (i.e. NT) in preceding 6 months from the date of recomposition shall not be
considered in the recomposition of KSE-100 Index.
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CALCULATION METHODOLOGY
In the simplest form, the KSE100 index is a basket of price and the number of shares
outstanding. The value of the basket is regularly compared to a starting point or a base period. In
our case, the base period is 1st November, 1991. To make the computation simple, the total
market value of the base period has been adjusted to 1000 points. Thus, the total market value of
the base period has been assigned a value of 1000 points.
An example of how the KSE100 Index is calculated can be demonstrated by using a three-stock
sample. Table 1 illustrates the process. First, a starting point is selected and the initial value of
the three-stock index set equal to 1000.
Taking stock A’s share price of Rs. 20 and multiplying it by its total common shares outstanding
of 50 million in the base period provides a market value of one billion Rupees. This calculation
is repeated for stocks B and C with the resulting market values of three and six billion Rupees,
respectively. The three market values are added up, or aggregated, and set equal to 1000 to form
the base period value. All future market values will be compared to base period market value in
indexed form.
Step 1: The Base Period Day 1 TABLE 1
Stock Share Price (in Pak Rs.) Number of Shares (in Rs.) Market Value
A 20.00 50,000,000 1,000,000,000.00
B 30.00 100,000,000 3,000,000,000.00
C 40.00 150,000,000 6,000,000,000.00
Total Market Capitalization 10,000,000,000.00
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Note: Base Period Value/Base Divisor = Rs. 10,000,000,000.00 = 1000.00 Base Period
Value/Base Divisor = Rs. 10,000,000,000.00 = 1000.00 * All figures taken are only hypothetical
Step 2: Index Value as on Day 2 TABLE 2
Stock Share Price (in Pak Rs.) Number of Shares (in Rs.) Market Value
A 22.00 50,000,000 1,100,000,000.00
B 33.00 100,000,000 3,300,000,000.00
C 44.00 150,000,000 6,600,000,000.00
Total Market Capitalization 11,000,000,000.00
Index = (11,000,000,000.00/10,000,000,000.00)*1000= 1.10 * 1000 = 1100
Thus, the formula for calculating the KSE100 Index is:
{(Sum of Shares Outstanding * Current Price)/Base Period Value}*1000
OR
(Market Capitalization/Base Divisor) * 1000
The KSE100 Index calculation at any time involves the same multiplication of share price and
shares outstanding for each of the KSE100 Index component stocks. The aggregate market value
is divided by the base value and multiplied by 1000 to arrive at the current index number.
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Investment and Portfolio Management

1 Open-end Mutual Funds

Step 1: The Base Period Day 1 TABLE 1

A 20.00 50,000,000 1,000,000,000.00

B 30.00 100,000,000 3,000,000,000.00

C 40.00 150,000,000 6,000,000,000.00

Total Market Capitalization 10,000,000,000.00

Step 2: Index Value as on Day 2 TABLE 2

A 22.00 50,000,000 1,100,000,000.00

B 33.00 100,000,000 3,300,000,000.00

C 44.00 150,000,000 6,600,000,000.00

Total Market Capitalization 11,000,000,000.00

Index = (11,000,000,000.00/10,000,000,000.00)1000= 1.10 1000 = 1100

Thus, the formula for calculating the KSE100 Index is:

{(Sum of Shares Outstanding * Current Price)/Base Period Value}*1000

(Market Capitalization/Base Divisor) * 1000

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