Chapter 16: 2.2 Example assessment

Hi,

Dividend yields are expressed relative to the value of the index at the time of assessment. For more on this see 'Yield adjustment' on page 11 of chapter 15 which says the income received over the 12 months prior to time t is:

I(t) x yt

Where yt is the dividend yield at time t and I(t) is the value of the index at time t.

I know that might initially seem a little strange but that is convention.

In terms of the 3 bullet points, we are assuming that the income is received at the end of each quarter when in fact for most indices of a reasonable size, dividends will be received fairly continuously. Therefore, we are making no allowance for any additional return that could be achieved by investing money earlier.

The second bullet points is essentially explaining the approach outlined above, that we apply the dividend yield to the value of the index on the same dates.

The third bullet point: Dividend yields are annual but we are working quarterly. Therefore, when we divide the dividend yield by 4 we are making an assumption that the income over the previous 12 months has been evenly spread. In practice it won't be but it's a reasonable approximation and it's all that we've got. If we knew exactly what the income had been in each quarter then we could do something more accurate.

Hope this helps.
Joe